If you’re new to being self-employed, you may be unaware of all of the deductions that you may be eligible to take. And that’s understandable. But one of the best ways to reduce your overall tax bill is to take advantage of each business expense write off that you’re eligible for, including small business tax deductions. For each tax deductible expense you include on your return, you’ll help lower your taxable business income, which in turn lowers your taxable income on your personal tax return.
There are hundreds of scenarios that might qualify you for a tax deduction. Even if you use tax software to file your taxes, there’s a good chance that you’ll miss some opportunities. That’s where this guide comes in. While we can’t possibly cover every possible tax deduction here, here are some very important ones you won’t want to overlook.
Tax deductions are a powerful tool for small business owners to reduce their taxable income and, consequently, their income tax liability. Essentially, a tax deduction is an expense that can be subtracted from your business’s gross income, lowering the amount of income that’s subject to tax. To qualify as a tax deduction, an expense must be both ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your business).
The IRS provides specific guidelines on what constitutes a tax deduction, and it’s crucial for small business owners to familiarize themselves with these rules. By understanding and properly claiming tax deductions, you can significantly reduce your tax burden and keep more of your hard-earned money in your business. This not only helps in managing cash flow but also in maximizing your profits.
We can’t prescribe a one-size-fits-all approach to tax deductions because every business is different. But we can walk you through some of the common ones you might be able to take advantage of. Keep your eyes peeled for these tax write off opportunities.
If you have an area in your home that is set aside exclusively for business, you can take advantage of home office deductions for your income tax for the year. There are two different formulas you may use to calculate your home office deduction. The first is quite simple. You multiply the square footage of your home office space by $5 and you have your deductible amount.
The more complicated method involves multiplying each expense you are claiming by the percentage your office takes up in your home. While the second method may generate a larger deduction, it will also increase scrutiny from the IRS, so make sure your measurements are quite precise if using it.
If you use the internet for any portion of your business, you can deduct either all or a percentage of the cost from your taxes. If you only use the internet line for business, you may deduct 100% of the cost of it. However, if you do not have a dedicated business internet connection, it is safer to simply deduct a percentage of the cost.
While you can’t deduct the full purchase price of a vehicle (unless you’re buying a company car), there are aspects of a vehicle that you can deduct. If you use your personal car for business, you can take a tax deduction for the business use. You can determine the amount of the deduction either by using the standard mileage rate or by determining your actual business-related car expenses.
To use the standard mileage rate, you multiply the number of business miles driven for the year by the mileage rate allowance for that year (67 cents a mile for 2024 and 70 cents a mile for 2025). To use the actual expense method, you have to determine all the costs for operating your car and multiply that number by the percent of time you use the car for business. For most self-employed workers, taking the mileage deduction is the easiest way to go.
If your business relies upon certain equipment to function, you can deduct not only the initial cost of the equipment but the cost of operating it as well. If the machinery has a higher price point, you may want to use the method of deduction called depreciation, which tracks its cost deduction over a period of time.
But you can also elect to deduct the full cost of many equipment purchases in the same year you bought them. Most small businesses won’t come close to the maximum deduction set at $1,220,000 for tax years beginning in 2024 (as dictated by Section 179). But if you aren’t sure whether you should depreciate your purchase over time or deduct it all at once, it’s highly recommended to chat with a tax professional. They’ll walk you through the pros and cons of each approach.
Since many deductions and the rules that surround them can be quite confusing, you may want to use the services of an accountant, and the tax preparation fees associated with your business are also deductible. Not to worry, however, as you can also deduct accounting fees associated with your business.
If the business you operate requires you to have specific licenses or to be certified in specific categories, the cost you incur while obtaining them is completely deductible from your income tax.
Similarly, you can deduct the cost of courses, workshops and training for your business if they maintain or improve your skills in the business, or the training is required to maintain your license. You cannot deduct the cost of education or training pursued to meet the minimum requirements of your business or to qualify you for a new business.
If you need to travel for business, keep those receipts for hotel, rental cars, cab fees, parking fees, tolls, and other travel expenses as those can be deducted when figuring out how much you owe at the end of the year.
Business insurance is an essential safeguard for any business, protecting against financial losses due to unforeseen events such as accidents, natural disasters, or lawsuits. The good news is that the premiums you pay for business insurance are tax-deductible, making them a valuable business expense.
There are various types of business insurance to consider, including liability insurance, property insurance, and workers’ compensation insurance. Each type serves a different purpose, from covering legal costs and damages to protecting your business property and helping ensure your employees are covered in case of work-related injuries. By choosing the right insurance for your business needs, you not only protect your assets but also benefit from tax deductions on the premiums paid.
When it comes to business meals and entertainment, the IRS allows you to deduct 50% of the cost, provided these expenses are directly related to your business. This includes meals with clients, customers, or employees where business discussions take place. To qualify for this tax deduction, you must keep detailed records of the date, time, location, and purpose of the meal or entertainment.
Additionally, meals provided to employees, such as those during work hours or at company events, can also be deducted. However, it’s crucial to maintain proper documentation to substantiate these expenses. By doing so, you can take advantage of this tax deduction while ensuring compliance with IRS regulations.
When you work for yourself, you’re responsible for the full portion of your own employment taxes (Social Security and Medicare taxes). This tax, charged at a rate of 15.3%, is usually split between an employer and employee. But self-employed workers pay the full rate for their solo wages.
Thankfully, half of those employment taxes are tax-deductible, helping reduce your taxable income. Regular employees can’t take this deduction.
Being self employed doesn’t mean that you have to do everything solo; smart entrepreneurs know when to delegate tasks to specialized professionals because often, the expense you pay is offset by the time you save. Whether you hire a lawyer to help you draft a new contract or a bookkeeper to help you keep accurate records, you might shell out a decent amount of cash for professional services.
Thankfully, these professional service fees qualify as deductible expenses. They’re legitimate costs of running your businesses, so they can help reduce your tax burden.
No business is complete without a business bank account. But a business account isn’t complete without the associated fees. If you also have an investment account to help improve your capital gains, you’ll probably have investment fees for that account, too. Expenses for personal bank accounts don’t qualify.
Thankfully, the expenses you pay to open and maintain your financial accounts are deductible. Your financial institution should provide you with a record of the fees you pay and the interest you earn, so keep that on file as proof of the deduction you’ve made.
If you’re working for yourself, there’s a good chance you’re shelling out a lot of cash for health insurance every month. Did you know those costs can actually be a tax write off for you? For many entrepreneurs, this can be one of the more helpful small business tax deductions.
Under the terms set out by the Internal Revenue Service, you can deduct up to 100% of qualifying health insurance expenses. You can make this deduction for premiums you pay for yourself, your spouse, your dependents, and any non-dependent children under the age of 27.
Promoting your business is essential, and the good news is that advertising and marketing expenses are fully deductible. This includes costs for creating and running ads on social media, search engines, or traditional media like radio and print. Expenses for business cards, promotional materials, and website hosting or design also qualify.
Even investments in tools like email marketing platforms or branding consultations can be deducted, making these efforts not only impactful but also financially beneficial.
If you belong to professional organizations, trade associations, or subscribe to industry-specific publications, the associated fees are deductible business expenses. These memberships and subscriptions must directly relate to your trade or business and serve a purpose in helping you stay informed, network, or maintain professional credentials. They’re a simple yet effective way to invest in your professional growth while lowering your taxable income.
Software and digital tools play a crucial role in running a modern business, and the subscription fees for these tools are fully deductible. Whether you rely on accounting software, project management platforms, design tools, or customer relationship management (CRM) systems, these expenses qualify as business deductions. Subscriptions for cloud storage, collaboration tools, and even industry-specific software also fall under this category.
By deducting these costs, you can offset a significant portion of the expenses associated with staying efficient and competitive in today’s tech-driven business landscape.
Ongoing education is key to staying competitive in your industry, and the costs associated with maintaining or improving your skills are deductible. Whether it’s attending workshops, webinars, or specialized training programs, these expenses qualify if they are directly related to your current business. However, it’s important to note that education aimed at entering a new profession is not deductible.
Giving back to the community doesn’t just feel good — it can also provide tax benefits. If your business donates money, goods, or services to qualifying charitable organizations, these contributions are often tax-deductible. To claim the deduction, ensure the recipient is a recognized nonprofit and maintain records of the donations. Contributions not only support your community but also provide a way to demonstrate your company’s values while reducing your tax liability.
Providing employee benefits is not only a great way to attract and retain top talent but also a tax-deductible expense. Costs associated with benefits such as health insurance, retirement plans, education assistance, or wellness programs can often be deducted as business expenses.
These deductions can apply to benefits offered to full-time and part-time employees. By investing in employee benefits, you create a supportive work environment while reducing your taxable income.
Accurate record keeping is the backbone of claiming tax deductions. To ensure you can back up your claims for these deductible business expenses, you must keep detailed records, including receipts, invoices, and bank statements. These records should be kept for at least three years in case of an audit. The last thing you want is to get an audit notice and spend months searching for proof of your purchases.
Using accounting software or hiring a bookkeeper can greatly assist in maintaining organized and accurate records. Proper record keeping not only helps in claiming the maximum amount of tax deductions but also in avoiding potential penalties and fines. By staying diligent with your records, you can confidently navigate the complexities of business tax deductions and optimize your tax savings.
Taking full advantage of tax deductions is a smart way to reduce your overall tax burden and keep more of your hard-earned money. By understanding which expenses are deductible and maintaining accurate records, you can confidently navigate the complexities of self-employment taxes. Whether it’s home office expenses, professional services, or health insurance premiums, these deductions can add up to significant savings.
For additional guidance, consider consulting a tax professional to ensure you’re maximizing your deductions while staying compliant with IRS rules. A small investment now to get professional guidance could help save you time and hassle in the long run.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Tax Information and Resources
Share
Related Articles
Start Your LLC Today