Tax season can be a stressful time, especially for small business owners and self-employed individuals. With so many moving parts, it’s easy to overlook valuable tax deductions that could significantly reduce your tax liability. Fortunately, the IRS offers a range of deductions specifically tailored for business owners – and those deductions could mean serious savings.
Whether you’re flying solo as a freelancer, running a startup, or managing a small team, knowing what you can legally deduct is a game-changer. Here’s your guide to 13 of the most common (and potentially most valuable) small business tax deductions.
1. Retirement Savings
Even if you’re self-employed, you can still benefit from retirement plans like a solo 401(k) or SEP IRA. These plans offer tax-deferred growth and allow you to reduce your taxable income.
- Solo 401(k): Contributions are not taxed in the year they’re made, and the account grows tax-deferred. Roth options are available for after-tax savings with tax-free withdrawals later.
- SEP IRA: Offers tax-deferred growth and flexible contributions with minimal administrative requirements.
Contributions for yourself are deducted as adjustments to income, while contributions for employees are deductible business expenses. Thus, you could get tax deductions on both the business and personal side.
2. Home Office Deduction
If you use part of your home exclusively for business, you may qualify for the home office deduction. You can use:
- The Regular Method: Based on actual expenses and the proportion of your home used for business.
- The Safe Harbor Method: Simplified calculation of $5 per square foot, up to 300 square feet ($1,500 max deduction).
Keep in mind, the space must meet the IRS’s “regular and exclusive use” requirement to qualify.
3. Car Expenses
If you use your car for business, you can deduct either the actual expenses (fuel, maintenance, depreciation) or use the IRS standard mileage rate. Note that commuting between home and office is not deductible. Mileage tracking apps can simplify recordkeeping and help ensure compliance.
4. Travel Expenses
Business travel is deductible if the primary purpose of the travel is business-related. Travel expenses include costs for things like transportation, lodging, meals, and even dry cleaning. However, the IRS disallows deductions for extravagant or personal travel expenses.
5. Healthcare Expenses
Self-employed individuals can deduct health insurance premiums for themselves, their spouse, and dependents. Additionally, a tax credit may be available for up to 50% of health insurance premiums paid through the SHOP Marketplace.
6. Taxes
Certain taxes you pay are deductible as business expenses, including:
- State and local income taxes
- Payroll taxes
- Real estate taxes on business property
- Sales tax on business-related purchases
7. Employee and Contractor Wages
Payments to W-2 employees and 1099 contractors are deductible. If you pay a contractor $600 or more during the year, issue a 1099-NEC and track all payments accordingly.
8. Rent on Business Property
The cost of renting commercial space (such as an office, storefront, or coworking facility) is fully deductible as a business expense.
9. Advertising Costs
Marketing and promotional expenses are deductible. This includes print ads, online campaigns, business cards, signage, and fees paid to marketing professionals or agencies.
10. Professional Fees
Fees for legal, accounting, consulting, and other professional services directly related to your business operations are deductible.
11. Professional Supplies
Items like paper, shipping materials, or any supplies necessary for your trade or business can be deducted in the year they’re used. Maintain proper documentation to support these claims in case of an audit.
12. Insurance Coverage
Business insurance policies, such as liability, malpractice, and property insurance, are typically deductible. However, personal life insurance premiums for a business owner are not deductible.
13. Startup Cost Deductions
You may deduct up to $5,000 in startup expenses and another $5,000 in organizational costs when launching a new business. These deductions help offset initial costs incurred before generating revenue.
Final Tip: Follow the “Ordinary and Necessary” Rule
The IRS requires that expenses be both ordinary and necessary for your business. Ordinary expenses are those that are common in your business’s industry, while necessary expenses are those that are helpful and appropriate for your business. Not every business expense qualifies, and certain categories (like entertainment) are no longer deductible.
Taking full advantage of allowable deductions can significantly reduce your taxable income and support the financial health of your business. Although tax season may not be fun, it doesn’t have to be painful – especially if you’re making the most of the deductions you deserve.
If you’re unsure where to start or want to ensure you’re maximizing your tax deductions, reach out to your tax professional to ensure you’re covering your bases and maximizing your savings.