26 Small Business Tax Deductions To Know
A small business tax deduction is a qualified expense you can deduct from your business’s gross income. Maximizing your tax write-offs can help lower your company’s annual tax bill.
Many small business owners don’t take advantage of the full scope of available deductions. Here are some standard small and home business tax deductions to help you improve your bottom line.
26 small business tax deductions
Understanding which small business tax deductions you can claim is the first step in lowering your annual tax liability. While all business entities — such as sole proprietorships, partnerships, corporations or LLCs — can benefit from claiming common tax deductions, check with your tax advisor about how to report them.
Here are some common small business tax deductions to consider. Of course, it’s best to consult with a tax professional to decide if this is the best option for your business.
1. Startup expenses
The costs of getting your business up and running are treated as capital expenses since you’re investing in your business. Small business startup costs can vary based on industry and overhead expenses but typically include advertising, training staff, inventory and office space (or your home office).
Typically, deducting capital expenses takes several years — a process known as amortization, which helps assess your business’s profitability on a yearly basis. Check out the IRS Publication 535 for more information on claiming business startup costs.
2. Business supplies
Business supplies and office expenses, such as office furniture, printer paper, staplers, pens, calculators and business cards, are deductible as long as you use them exclusively for your business.
According to the IRS, business expenses must be ordinary and necessary, meaning they are “common and accepted in your trade” and “helpful and appropriate,” though not necessarily indispensable.
However, this deduction is for items you expect to use within the year you purchased them. For items with a longer expected lifespan, you’ll need to list them under “depreciation” (more on this below).
3. Software and electronics
Small business computers and software you need to successfully run your business, including small business accounting software or Microsoft Word, can be tax-deductible. Online software subscriptions also count, such as social media scheduling apps, like Hootsuite and Buffer.
4. Home office deduction
If you run your business out of your home, you may be able to deduct expenses for using your residence on your small business tax return. Homeowners and renters can utilize the home office deduction, and any residence can qualify — single-family home, condominium, apartment, manufactured housing, freestanding studio or your garage.
To qualify for the home office deduction, you must meet the following criteria:
- Regular and exclusive use. The home office space must be used exclusively for your business, and on a regular basis. For example, if the room has your office desk plus a guest bed for when your parents visit, it doesn’t count as “exclusive use.”
- Principal place of business. Your home office must be the primary location for your business activities. You can still conduct business outside your home, provided your home remains your primary base. For instance, if you work most hours at home but occasionally meet clients at a restaurant or cafe, you can still deduct expenses for the part of your home you use exclusively for business purposes.
There are some exceptions to these rules, including running an in-home daycare. In this case, meeting the “exclusive use” criteria would be impossible if you’re watching children in your living area. Refer to Publication 587 for more information on the business use of your home.
How to claim the home office deduction
When claiming the home office deduction, you have two options: the simplified or regular method. With both methods, you can’t claim home office expenses that exceed your annual income. And while you can’t switch options in the same tax year, you can switch methods from year to year.
When choosing which method to use for your home office deduction, keep in mind that both have pros and cons.
|Home office deduction options||Pros||Cons||Tax forms and notes|
Simple and easy: You can claim a standard five dollars per square foot deduction (not to exceed 300 square feet) based on the total square footage of your home office space.
Less paperwork: You don’t need to keep mortgage or rent statements or utility receipts.
The deduction is capped: You can’t claim more than $1,500 in a single tax year.
Can’t claim other expenses: This method doesn’t allow any extra deductions, such as mortgage interest, depreciation, insurance or utilities.
No carry over allowed: If your business experiences a loss, you can’t carry the home office expense to the following year like you can with the regular method.
|If you use the simplified method and itemize deductions, you can deduct some expenses for your home that are otherwise deductible, including mortgage interest and property taxes, as itemized deductions using Form 1040 or 1040-SR, Schedule A.|
No deduction limit: You can claim a percentage of all home expenses that relate to your business (based on the square footage used for business purposes), including mortgage interest, utilities, repairs, insurance, depreciation and more.
Carry over unused deduction: If your business experiences a loss but still reports the home office expenses, you can carry the deduction to the following year’s tax return.
More admin work: You’ll need to keep detailed records of every expense for your home office.
Depreciation recapture: If you sell your house, you’ll need to pay the IRS capital gains tax on the depreciation deductions you took for the home office — currently taxed at a 25% rate (unless your tax bracket falls below 25%).
|If using the regular method, you should use IRS Form 8829 for certain business-related tax deductions when filing your taxes. But be aware that some business expenses, such as telephone expenses, don’t fall under the home office deduction. Instead, deduct such expenses on your Schedule C or F.|
The regular method requires a lot more work, but you have the potential for a larger deduction if you have a lot of qualified expenses within a year. The simplified method is easier but not ideal if you want to avoid paying capital gains tax on the depreciated deductions when you sell your home, or if you want to carry over losses.
Discuss each method and its limitations with your tax advisor so you can make an informed decision.
5. Rent or depreciation
You can deduct rent for an office, brick-and-mortar, conference or co-working space you need to operate and run your business or to host business-related events. However, you can’t deduct rent as a business expense if you have or will receive equity in or a title to said property. Per the IRS, rent is defined as “any amount you pay for the use of property you do not own.” (If using space in your home residence, see above for the “home office deduction.”)
You can also depreciate the cost of equipment financing, long-term supplies or machinery used for your business. Depreciation works by deducting a percentage of the expense annually for five to seven years.
Alternatively, you may claim 100% of the expense at once (up to a certain limit) under Section 179 in the year you placed the qualifying item, property or equipment into service.
6. Utilities, phone and internet
If you own or rent a brick-and-mortar business or office space, you can deduct all necessary utilities such as gas, electricity, trash and water. For those claiming the regular home office deduction, you can only deduct a portion of these expenses since part of your utility bills are for personal use. Remember, you can’t claim utilities if using the simplified home office deduction.
You can claim phone expenses that are essential to successfully running your business. However, the primary phone for your home office is not deductible, whether a landline or a cell phone, although charges for business long-distance phone calls count as deductible business expenses. Additional landlines or cell phones for your home business are deductible — but only the percentage used for business purposes.
You can claim 100% of your internet service at a store or dedicated office space. However, when claiming internet you use at home, be sure to calculate the percentage used for your business.
7. Cleaning services and supplies
You can deduct cleaning services and supplies you purchase for your business’s storefront or office space. If running your business at home, you can only deduct the percentage used for your dedicated business space (and only if claiming the regular home office deduction).
8. Repairs and maintenance
You may also be able to deduct home repairs and maintenance performed on your residence, but only for the part of your residence exclusively used for business purposes.
According to the IRS, an example could include “painting or repairs only in the area used for business,” like a new coat of paint or replacement flooring in your home office.
9. Security system
A security system that secures your business is deductible as a business expense.
This expense is only partially deductible as a home business expense, provided you use part of your home for business purposes.
10. Car costs
If you use your car for business purposes, you can deduct auto-related expenses on your tax return. However, if you use your car for both personal and business use, you must divide your expenses based on the mileage you drive for personal and business purposes.
You have two choices on how to claim your business-related car expenses: standard mileage rate vs. actual costs. Once you pick a method for a vehicle, you can’t change it.
- Standard mileage: You track your miles driven for business-related activities, then use the applicable year’s mileage rate. The IRS maintains a table of standard mileage rates to calculate deductions
- Actual expenses: You track your actual expenses, such as car insurance, repairs, gas and registration fees, then multiply this figure by how much you used the car for business purposes.
Whichever method you use, it’s crucial to write down the purpose of each business trip and the total miles driven. You can review all of your car trips by using Google Maps Timeline — just be sure to enable your phone’s Location History. However, exporting the data and figuring out which trips were for business purposes can take a lot of time and effort. Alternatively, you can download an app to easily track business miles, such as Mileage Tracker by MileIQ.
11. Employees’ pay and contracted labor
You can write off all payments made to part- or full-time W-2 employees, even if you operate your business out of a home office.
You can also deduct payments made to freelancers, contract workers or other non-employees. Be sure to file a 1099-NEC form for any non-employee who earned $600 or more for the year — the filing deadline is Jan. 31 for the prior tax year.
12. Fringe benefits
You can typically deduct benefits you provide for your employees, referred to as fringe benefits.
Here are some examples:
- Small business retirement plans, such as a SEP IRA or Solo 401(k)
- Health insurance premiums
- Life insurance policies
- Educational expenses (if you participate in a qualified educational assistance program)
- Dependent care assistance
- Fitness memberships
- Employee gifts ($25 per employee per year)
13. Business meals and entertainment
Small business owners can deduct ordinary meal and entertainment expenses directly related to your business. The activity must have a clear business objective, such as promoting your business, gaining new clients, building rapport with current clients, networking, training staff or drafting a business plan.
Typically, business meals are deductible up to 50%; however, the enhanced business meal deduction allowed you to claim up to 100% for food and beverage charges made after Dec. 31, 2020 and before Jan. 1, 2023. Also, certain events, such as food for an office party, are 100% deductible.
Save all relevant receipts and note the business purpose for claiming this deduction.
14. Professional services and fees
If you pay for professional services, such as legal advice or tax preparation, these expenses can be deducted as business expenses.
15. Interest and bank fees
Also, maintenance fees charged for a business bank account are fully deductible — so it’s a good idea to keep your business and personal bank accounts separate.
According to the IRS, you may be able to deduct various federal, state, local or foreign taxes that are directly related to your trade or business.
17. Bad debt
To deduct a bad debt expense, you must first show the amount as income and then prove that the transaction was a business loan, not a gift.
The IRS gives the following bad debt examples:
- Loans made to clients, suppliers, distributors and employees
- Credit sales to customers
- Business loan guarantees
Refer to Topic No. 453 for more information on the bad debt deduction.
18. Business insurance
You can typically deduct the cost of business-related insurance products you pay for, provided they apply to your trade or profession.
Health insurance for yourself and your family is deductible as a business expense when you’re self-employed. However, you don’t need a home office to qualify for this deduction.
19. Cost of goods sold
If your business creates products or purchases them for resale, you can typically deduct the cost of these products or the costs involved in manufacturing them. This can include the cost of raw materials, freight, shipping, storage, direct labor and more.
20. Qualified business income
As a result of the Tax Cuts and Jobs Act of 2017, you may be able to deduct up to 20% of your qualified business income on your taxes. However, this deduction has limitations based on your trade or business as well as how much you earn.
Specifically, joint tax filers with incomes below $340,100 and other filers below $170,050 can claim this deduction in full provided they work in a qualifying industry. For 2022, joint tax filers with incomes between $340,100 and $440,100 and individuals with incomes between $170,050 and $220,050 were subject to phase-outs.
21. Travel expenses
Business-related travel expenses can also be taken as a business expense. This could include taking a taxi, Uber, bus or plane to meet with clients or to attend professional education or training events.
22. Advertising and marketing
Anything used to help the spread word about your business can count as a business expense. Examples include digital and print ads, website design, business cards, posters and banners.
If you pay for marketing help or a business coach, these expenses can be deductible from your business income.
23. Shipping costs and postage
If you ship items for business purposes, shipping costs can be deductible from your taxes. The same is true for postage when used for business purposes.
24. Memberships and subscriptions
Professional memberships you pay for and subscriptions to business-related publications can also be tax-deductible. For example, a freelance writer might pay for a subscriber-only newsletter that lists potential job offerings, workshops and writer networking opportunities.
25. Education and training
You can deduct expenses related to furthering your education if it helps bring value to your business or allows you to gain more expertise in your business’s industry.
The following educational expenses typically qualify for this deduction:
- Courses and classes related to your industry
- Books needed for research
- Seminars and webinars
- Networking events
- Trade publication subscriptions
- Fees associated with necessary qualification or certificate programs
- Travel expenses to get to training events or workshops
26. Charitable contributions
If you make charitable donations throughout the year to qualifying organizations, you can claim these on your tax return. How to claim them depends on your business’s entity. For example, if you’re a sole proprietorship, LLC or partnership, you must declare these on your personal tax return. However, corporations can claim these on their corporate tax return.
How to write off business expenses
Your business entity determines how you report your earnings and business tax deductions.
- Sole proprietorships: Use a Schedule C form
- LLC partnership: Use Form 1065
- Corporation: Use Form 1120
Struggling to stay on top of expenses throughout the year? Consider using small business tax software to keep your finances organized and ready to go when tax season hits. And remember to refer to the IRS when compiling a list of deductible business expenses — that’s where you’ll find the most current and up-to-date info.