What exactly is a tax deduction?
A tax tax write-off ( or “ tax write-off ” ) is an expense that you can deduct from your taxable income. You take the come of the expense and subtract that from your taxable income. basically, tax write-offs allow you to pay a smaller tax placard. But the expense has to fit the IRS criterion of a tax deduction .
Below you ’ ll find a comprehensive examination tilt of write-offs normally available to self use businesses that are organized as sole proprietorships or partnerships. Some of these are directly related to running a business, and some are more personal deductions that a modest business owner should be mindful of.
Further reading: Tax Credit vanadium Tax deduction : What ’ s the Difference ?
Tax deduction savings
Making the most of all your available tax deductions can save you hundreds—even thousands—of dollars at tax time .
Let ’ s expect at an case .
Joe is a freelance writer and had $ 60,000 in self use income in 2021. He has to pay 15.3 % self employment ( SE ) tax plus income tax based on his individual tax rate. The SE tax on $ 60,000 is $ 8,478 ( broadly only 92.35 % of SE income is topic to SE tax ) and the income tax is $ 4,865, for a total of $ 13,343 .
( For simplicity, we assumed Joe is individual with no children and no other types of taxable income to consider. )
In early on 2022, Joe joined Bench and his bookkeeper located $ 6,000 worth of contractor expenses that he was not mindful of. These expenses count as tax deductions and reduce his net income self employment income to $ 54,000 .
now, with $ 54,000 in taxable self employment income, he pays $ 7,630 in SE tax and $ 4,200 in income tax, for a total of $ 11,830 .
Adding the extra business expenses saved Joe over $1,500 in taxes!
By locating the $ 6,000 in contractile organ expenses, Bench was able to reduce Joe ’ s tax indebtedness by over $ 1,500 dollars. A nice save he can use to upgrade his laptop this year .
repeat this for all the available deductions Joe had expenses for, and he can importantly reduce the income he has to pay taxes on—saving him thousands of dollars .
Staying on top of your deductions
As a little business owner, it can be difficult to know what deductions are relevant to you .
many people struggle to stay on top of their deductions year round and rather try to piece things together at year end and run into difficulties. Remember that restaurant expense you incurred in January final year ? Most people don ’ t, and therefore they miss this tax write off. Add them all up and you ’ re missing out on a fortune of tax savings .
That’s where bookkeeping comes in.
To claim these deductions, you ’ ll need to keep accurate records and stay on top of your monthly bookkeeping .
Ongoing bookkeeping is critical to help you tally up your deductions. If you don ’ t have a good DIY frame-up you ’ re glad with, check out Bench. We ’ ll do your bookkeeping for you .
When workbench does your bookkeeping, we catch these deductions every calendar month so you have confidence you ’ ve hitch everything and minimized your tax indebtedness. then at year end, send Bench ’ s books to your accountant. Or, let us take tax filing off your plate for thoroughly with Bench ’ s minor occupation tax accompaniment —we ’ ll do your bookkeeping and tax file for you. Consider your tax season concern spare !
The top 17 small business tax deductions
Each of these expenses are tax deductible. Consider this a checklist of minor business tax write-offs .
And remember, some of the deductions in this list may not be available to your belittled commercial enterprise. consult with your tax adviser or CPA before claiming a tax write-off on your tax revert .
Click the links below to skip ahead to a specific deduction, or keep scrolling to learn about them all.
Advertising and promotion
Click the links below to skip ahead to a specific deduction, or keep scroll to learn about them all. The cost of advertise and promotion is 100 percentage deductible. This can include things like :
- Hiring someone to design a business logo
- The cost of printing business cards or brochures
- Purchasing ad space in print or online media
- Sending cards to clients
- Launching a new website
- Running a social media marketing campaign
- Sponsoring an event
however, you can not deduct amounts paid to influence legislation ( i.e., lobbying ) or patron political campaigns or events .
Having branch bank accounts and credit cards for your business is constantly a good estimate. If your bank or credit card company charges annual or monthly serve charges, transfer fees, or overdraft fees, these are deductible. You can besides deduct merchant or transaction fees paid to a third-party requital processor, such as PayPal or Stripe .
You can not deduct fees related to your personal bank accounts or credit cards .
You can by and large deduct 50 % of qualifying food and beverage costs. To be eligible for the discount :
- The expense must be an ordinary and necessary part of carrying on your business
- The meal cannot be lavish or extravagant under the circumstances
- The business owner or an employee must be present at the meal
You can deduct 100 % of the cost of providing meals to employees, such as buying pizza for dinner when your team is working late. Meals provided at office parties and picnics are besides 100 % deductible .
Be sure to keep documentation for the out that includes the come of each expense, the date and position of the meal, and the clientele relationship of the person you dined with. A good way to do this is to record the determination of the meal and what you discussed on the back of the acknowledge .
Further reading: How to Deduct Meals and Entertainment
You can deduct the premiums you pay for commercial enterprise indemnity .
This may include :
- Property coverage for your furniture, equipment, and buildings
- Liability coverage
- Group health, dental and vision insurance for employees
- Professional liability or malpractice insurance
- Workers compensation coverage
- Auto insurance for business vehicles
- Life insurance that covers employees, as long as the business or business owner is not a beneficiary on the policy
- Business interruption insurance that covers lost profits if your business is shut down due to fire or another cause
Business use of your car
Do you use your vehicle for business ? If you use your vehicle entirely for clientele purposes, then you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related use .
There are two methods for deducting vehicle expenses, and you can choose whichever one gives you a greater tax benefit .
- Standard mileage rate. Multiply the miles drive for business during the class by a standard mileage rate. For miles drive in 2021, the standard mileage subtraction is $ 0.56 per mile. In 2022, it is $ 0.585 per mile .
- Actual expense method. Track all of the costs of operating the vehicle for the year, including natural gas, vegetable oil, repairs, tires, indemnity, registration fees, and lease payments. Multiply those expenses by the share of miles driven for clientele. note that you can not switch from the actual expense method to the standard mileage method acting on the lapp fomite .
Both methods require that you track your business miles for the year. You can keep a detailed log of your business miles, use an app to track your trips, or reconstruct a mileage log using other documents, such as calendars or appointee books. If you keep a mileage log, distinctly document the miles drive, time and place, and commercial enterprise determination of your trip .
note that you can not count the miles compulsive while commuting between your home and your regular stead of business. These costs are considered personal commutation expenses .
If you hire freelancers or freelancer contractors to help in your business, you can deduct their fees as a business expense .
just remember, if you pay a contractor $ 600 or more during the tax year, you ’ re required to send them a Form 1099-NEC by January 31st of the following class .
When you purchase furniture, equipment, and other business assets, depreciation rules require you to spread the costs of those assets over the years you ’ ll use them rather than deducting the broad price in a single stumble .
Expensing these items upfront is more attractive because of the quick tax profit. fortunately, the IRS gives occupation owners several ways to write off the full cost in one year .
- De minimis safe harbor election. belittled businesses can elect to expense assets that cost less than $ 2,500 per detail in the class they are purchased. You can read more about the de minimis safe harbor election in this IRS FAQ .
- Section 179 deduction. The section 179 subtraction allows business owners to deduct up to $ 1,080,000 of property placed in service during the tax year. This includes new and use commercial enterprise property and “ off-the-rack ” software. The section 179 discount is limited to the occupation ’ s taxable income, thus claiming it can not create a web personnel casualty on your reappearance. however, any fresh section 179 deduction can be carried forth and deducted on next year ’ mho reappearance .
- Bonus depreciation. Businesses can take advantage of bonus depreciation to deduct 100 % of the cost of machinery, equipment, computers, appliances, and furniture.
If you purchased a new vehicle during the tax year, the IRS limits write-offs for passenger vehicles. In the beginning year, if you don ’ triiodothyronine claim bonus depreciation, the utmost depreciation discount is $ 10,100. If you do claim bonus disparagement, the maximum write off is $ 18,100 .
depreciation is more complicated than your average subtraction, so we recommend reading our article What is Depreciation ? And How Do You Calculate It ?, and asking your accountant which assets you can deduct in your occupation .
education costs are amply deductible when they add measure to your occupation and increase your expertness. In order to decide if your class or workshop qualifies, the IRS will look at whether the expense maintains or improves skills that are required in your current business .
The postdate list contains examples of valid business education expenses :
- Classes to improve skills in your field
- Seminars and webinars
- Subscriptions to trade or professional publications
- Books tailored to your industry
- Workshops to increase your expertise and skills
- Transportation expenses to and from classes
Keep in judgment that any education costs that would qualify you for a modern career, or costs related to education outside of the region of your occupation, don ’ thyroxine qualify as clientele tax deductions .
Home office expenses
If you use a home office for your business, you may be able to deduct a part of your house expenses against business income. There are two ways to deduct home office expenses .
- Simplified method. You can deduct $ 5 per square foot of your home that is used for business, up to a maximal of 300 square feet .
- Standard method. Track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping and landscaping service, homeowners association fees, and repairs. Multiply these expenses by the percentage of your home devoted to occupation use .
To qualify for the home agency tax write-off, you need to measure up in two areas :
- Regular and exclusive use. To pass the regular and single use requirement, you must regularly use your home position entirely for conducting clientele activities. A desk that doubles as your kitchen postpone won ’ thymine knead. You don ’ t need to dedicate an entire board to your business, but your work area should have distinctly identifiable boundaries. You may want to keep photos of your home function workspace with your tax software documentation as testify in lawsuit the IRS selects your reappearance for audited account .
- Principal place of business. Your home office must be your principal position of business. This means you spend the most meter and behave important business activities here .
If you use the standard method acting for calculating your dwelling office subtraction, you ’ ll indigence to file Form 8829 along with your Schedule C. Learn more about the home office deduction .
If you take out a lend or use a credit card to cover business expenses, you can deduct the interest paid to your lender or credit batting order company a retentive as you meet the follow requirements :
- You are legally liable for the debt. For exemplar, if your parents take out a second mortgage on their home to help you start a business, you are not legally liable for the debt. In that case, interest on the loanword is not deductible, even if you make all of the payments on the mortgage .
- Both you and the lender intend for the debt to be repaid. A loan that doesn ’ t have to be repaid is a giving .
- You and the lender have a true debtor/creditor relationship. The IRS tends to scrutinize loans between related parties, such as class members. If you use the accumulation method of account, you can not deduct interest owed to a relate person until the payment is made .
Keep in mind that if a loan is separate occupation and part personal, you need to divide the interest between the business and personal parts of the loan .
Legal and professional fees
Legal and professional fees that are necessary and immediately related to running your occupation are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and on-line bookkeeping services such as Bench .
If the fees include payments for solve of a personal nature ( for model, making a will ), you can lone deduct the character of the tip that ’ randomness related to the business .
The Tax Cuts and Jobs Act of 2017 eliminated the tax write-off for moving expenses for all unmilitary individuals, but businesses can still deduct the cost of moving business equipment, supplies and armory from one business localization to another .
Be sure to keep good records to substantiate all costs associated with your occupation move .
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense .
Keep in mind, lease paid on your home should not be deducted as a business expense, flush if you have a home agency. That lease can be deducted as a part of home office expenses .
Salaries and benefits
Salaries, benefits and even vacation time paid to employees are generally tax-deductible, equally long as they meet a few criteria :
- The “employee” is not the sole proprietor, a partner, or an LLC member
- The salary is reasonable, ordinary, and necessary
- The services were actually provided
Taxes and licenses
You can deduct diverse taxes and licenses related to your business. This may include :
- State income taxes
- Payroll taxes
- Personal property taxes
- Real estate taxes paid on business property
- Sales tax
- Excise taxes
- Fuel taxes
- Business licenses
Telephone and internet expenses
If telephone and internet services are built-in to your business, they can be deductible business expenses .
Keep in beware, if you use a land line at home, you can not deduct the cost of your first base line, even if you use it entirely for work. however, if you have a second land line devoted to the business, the cost of that lineage is deductible .
If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the share allocable to occupation use. Keep an enumerate poster or other detailed records to prove the amount of business use in case your return is audited .
For a slip to qualify as commercial enterprise travel, it has to be ordinary, necessity, and aside from your tax home. Your tax home is the integral city or sphere in which you conduct occupation, regardless of where you live. You need to travel away from your tax home for longer than a convention day ’ randomness work, requiring you to sleep or rest en route .
deductible, IRS approved business travel expenses include :
- Travel to and from your destination by plane, train, bus, or car
- Using your car while at a business location
- Parking and toll fees
- The cost of taxis and other methods of transportation used on a business trip
- Meals and lodging
- Laundry and dry cleaning while on a business trip
- Business calls
- Shipping of baggage and sample or display materials to your destination
- Other similar ordinary and necessary expenses related to your business travel
Remember to keep records that include the sum of each expense, deoxyadenosine monophosphate well as dates of return/departure, details of the slip ( whom you met with ), a mileage logarithm if you drove your own vehicle, and the business reason for the slip .
Further reading: Are Travel Expenses Tax Deductible ?
Personal tax deductions for business owners
The above-mentioned deductions can be claimed on Schedule C or Form 1065 ’ mho Schedule K-1, but there are a few early tax breaks humble occupation owners normally claim on their individual returns .
Sole proprietorships, LLCs, and partnerships can not deduct charitable contributions as a business expense, but the commercial enterprise owner may be able to claim the discount on their personal tax reappearance .
To qualify, the contribution must be made to a qualify arrangement .
Starting with 2020 returns, taxpayers can claim up to $ 300 of cash contributions as an “ above-the-line ” deduction on class 1040. To deduct more than that, the business owner has to itemize deductions on Schedule A attached to Form 1040 .
Child and dependent care expenses
If you pay person to care for a child or another dependant while you work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving the poster must be a child ( under long time 13 ) or a spouse or other subject who is physically or mentally incapable of self-care .
The credit is worth between 20 % and 35 % of your permissible expenses, depending on your income. permissible expenses are limited to $ 4,000 for the care of one dependent and $ 8,000 if you paid for the manage of two or more dependents. IRS Publication 503 provides more information on the Child and Dependent Care Credit. You ’ ll indigence to attach Form 2441 to your form 1040 to claim the accredit .
You can deduct contributions to employee retirement accounts as a business expense. The sum you can deduct depends on the character of design you have. Check out the IRS ’ s tips for calculating your own retirement design contribution and deduction for more information .
Health care expenses
In addition to insurance premiums, you can deduct other out-of-pocket medical costs, such as function co-pays and the monetary value of prescriptions. These costs are normally included on enumerate deductions on Schedule A .
freelance business owners can besides deduct health indemnity premiums for themselves, their spouse, and dependents on Schedule 1 attached to their form 1040. however, if you are eligible to participate in a plan through your spouse ’ randomness employer, then the business can ’ thyroxine deduce those premiums .
The bottom line
tax deductions are an essential way to minimize the sum of tax you have to pay, and full record keeping will ensure you get to keep those deductions if the IRS ever comes knocking.
Read more: When Can You File Taxes? | H&R Block
Have your team of consecrated bookkeepers at Bench track all of the expenses related to running your business to ensure you ’ re taking advantage of every legalize deduction. Send Bench ’ s books to your accountant at year end, or let us take the tax filing off your plate for well ! Learn more .
More resources for small businesses
Own a retail store or a startup?
Our friends at Gusto put together a handy tilt of store deductions and inauguration tax deductions .