There are many tax deductions small business owners can take to save money when they file their annual return; however, new entrepreneurs (and even seasoned ones) may not be aware of all the opportunities they have to lower their tax bill.
Tax deductions reduce the amount of your business’s taxable income, which can save you money on your quarterly or yearly taxes. Here are 10 tax deductions your small business should know about.
Home office
The IRS allows business owners, including self-employed freelancers and independent contractors, who utilize a home office for their business to deduct certain expenses that go into furnishing and maintaining it. The amount you can deduct will depend on the size of the home office in square footage. This space must be exclusive for business, even if it’s only a section of a room that has another use.
[Read more: Getting Ready to File? Tax Deductions For Home-Based Businesses]
Startup expenses
If you’re just starting your business, you can claim up to $5,000 before the launch of your business in startup expenses. While there are a few prerequisites to consider, the costs that are usually considered tax-deductible are:
- Training expenses.
- Travel costs for obtaining employees, suppliers, and customers.
- Market research.
- Advertising expenses.
- Wages for contractors or consultants.
Repairs and maintenance
If you have a brick-and-mortar store, you may find repairs and maintenance are necessary as the building ages. You can deduct repair and maintenance costs that are necessary to keep the building in working, ordinary order. Examples may include painting the exterior or interior of the building and sealing leaks or cracks. It’s important to note that these repairs must be solely to maintain the building rather than improving, such as adding a new room, which is not tax-deductible.
Business insurance
Depending on your state, the majority of businesses are required to carry a few forms of business insurance, such as worker’s compensation insurance, general liability insurance, and professional liability insurance. Each of these insurance forms is considered necessary for a business’s operation and can be deducted from your taxable income.
All of your employees’ wages are also considered fully deductible, including any bonuses and commissions, as long as the payments are deemed ordinary, reasonable, and for services rendered.
Advertising and marketing
The IRS considers any costs relating to advertising and marketing to be tax-deductible. This includes billboard promotion, online advertising, and the cost of producing advertising materials, such as business cards or logos and more.
Employee salaries
All of your employees’ wages are also considered fully deductible, including any bonuses and commissions, as long as the payments are deemed ordinary, reasonable, and for services rendered. This deduction can also apply to independent contractors; however, they must be classified correctly to avoid penalties.
[Read more: 9 Employee Benefit Costs You Can Deduct from Your Taxes]
Charitable contributions
If your business has made a donation to charity, you may be able to claim it on your tax return. The contribution must be a cash donation and benefit a qualified charitable organization, such as a religious organization or a nonprofit founded in the United States. If the business is an LLC, sole proprietorship or partnership, these charitable contributions must be claimed on personal income tax forms.
Bad debt
A “bad debt” is defined by the IRS as a loss of a debt that occurred through the business or one that was closely related to your trade or business. This includes instances where you may have loaned money to an employee, vendor, or customer and did not see a return. You must prove that the debt was related to the business and not a personal debt.
[Read: 10 Commonly Overlooked Small Business Tax Credits]
Business vehicle
Expenses from the usage of a company or business vehicle are usually seen as 100% deductible, such as tolls, maintenance fees, licenses, insurance, and more; however, it’s vital to keep detailed records of how the business is using the car, including tracking the mileage. Additionally, the costs must be divided based on mileage if you also rely on the vehicle for personal use.
Business entertainment
The events and meals you provide your employees and potential customers or vendors can also be tax-deductible. The amount you can claim depends on when and where you made the purchase. Meals purchased from restaurants in tax years 2021 and 2022 are considered 100% deductible under the Consolidated Appropriations Act of 2020. However, for tax year 2023, all meal and entertainment purchase deductions will revert back to the guidelines set forth in the Tax Cuts and Jobs Act, which state:
- Employee office parties are 100% deductible.
- Meals and snacks for employees at the office are 50% deductible.
- A business dinner with a client is 50% deductible.
For more information on small business taxes, check out our guide for 2023 tax season planning.
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