11 Tax Deductions for Small Business Owners
If you own a small business, you’re likely looking for ways to make every dollar stretch further. Given inflation, labor shortages, supply chain issues and the lingering effects of the COVID-19 crisis, you probably have some financial worries and want to do everything you can to set your small business up for success, even in the current economic situation.
One way to do that is by lowering your tax bill. By documenting applicable income tax deductions for small business owners, you can significantly reduce your tax liability, aka the amount you owe. A tax deduction is a write-off and refers to an expense that can be deducted from your taxable income. For example, if you make $70,000 as a freelance consultant but find $5,000 worth of deductions, your income is only $65,000 — at least according to the IRS. In that case, you owe less money in taxes.
In this post, we’ll review 11 of the best tax deductions for small business owners. You may already know about some tax deductions, but others may come as a (happy) surprise.
Advertising, marketing and promotion
Need to get the word out about your small business? Any expense associated with advertising, marketing or promoting your company qualifies as a small business owner tax deduction. These might include payments for ads in the local paper or on social media, the cost of promotional materials like posters or company swag or hiring a graphic designer to create a new logo. Advertising aimed at retaining the customers you already have, like promotional gifts for longtime customers, counts as tax deductions, too.
According to the IRS, bad debt is “a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless.” Bad debt is incurred when you lend money you don’t get back. Examples include credit sales to customers, loans to vendors and employees, and the sale of mortgaged property. If your bad debt qualifies and is related to business rather than personal debt, you can claim it as a deduction.
If running your small business includes travel, you can deduct several related expenses. For example, if at least half of your domestic travel days are for business purposes, you can deduct the costs of airfare, accommodations, meals and transit. Also, if you use your car for business-related activities, you can deduct many of those costs. These include what’s known as actual vehicle expenses: gas, repairs, registration, insurance, maintenance and even the cost of the vehicle itself.
Depreciation, or the loss of value over time, qualifies as a tax deduction. If your small business owns equipment or machinery that costs $2,500 or more, it can’t be expensed and must be depreciated instead.
You can deduct a range of associated expenses if you have a physical, dedicated office space in your home. Any supplies you purchase for your office, such as furniture, paper, boxes, staples, and pencils, qualify as deductions, as do decorations, stickers and other aesthetic purchases.
According to SCORE, this is one of the most overlooked deductions for small business owners. If you’re self-employed and pay for your health insurance, you can deduct that (often very significant) cost and any payments for your family’s insurance plans. Business insurance also falls under this umbrella, as do liability coverage, malpractice insurance, property insurance, auto insurance and workers’ compensation costs.
Do you rent or lease space for your business offices? If so, those payments qualify as tax write-offs. The same is true of any lease payments for equipment or machinery. Interestingly, you can also take advantage of the Augusta Rule, in which your business pays you rent for up to 14 days of the year.
Retirement plan contributions
Contributions to your own or your employees’ retirement plans are tax deductible. Retirement accounts also come with their own sets of tax benefits, depending on the type you have. Plus, whatever you put in, you’ll get out when you retire (and then some).
You can start claiming expense deductions before your business is officially “in business.” In fact, most small business owners can write off up to $5,000 in start-up costs on their first year’s return.
Training and education
Education and training programs directly related to furthering your skill set or helping your business succeed are fully deductible. These include workshops, online courses, educational webinars, events and conferences, subscriptions to trade publications and even books about your industry or business best practices. Costs associated with sending your employees to educational events or training programs are also deductible.
Employee wages and payroll taxes
Salaries paid to your employees and taxes on employee payroll, are fully deductible business expenses. You can deduct their fees if you hire contractors or freelancers. Remember to send any contractor you paid more than $600 a Form 1099-NEC by Jan. 31 of the next year.
Save at tax time
For small business owners, every deduction counts. For more information on small business owner tax deductions, visit the IRS website or consult your own tax professional. Learn how to uplevel your tax preparation skills with CPE courses from Surgent Income Tax School and get tips on growing your business here.