One of the easiest ways to lower your income tax bill is by making sure you claim all the tax deductions available to your small business.
What is a Tax Deduction?
A tax deduction, or “tax write-off,” is an expense you can subtract from your taxable income. By deducting this amount, you effectively reduce your taxable income, leading to a lower tax bill. However, the expense must meet the IRS criteria for a tax deduction.
Below is a comprehensive list of common write-offs for self-employed businesses organized as sole proprietorships or partnerships. Some of these deductions are directly related to business operations, while others are personal deductions that small business owners should know about.
Tax Deduction Savings
Maximizing your tax deductions can save you hundreds, even thousands, of dollars when it’s time to file taxes.
Example:
Joe, a self-employed writer, earned $60,000 in self-employment income in 2023. He needs to pay a 15.3% self-employment (SE) tax plus income tax based on his individual rate. The SE tax on $60,000 is $8,478 (since only 92.35% of SE income is subject to SE tax), and the income tax is $4,865, totaling $13,343.
(For simplicity, we assume Joe is single with no children and no other taxable income.)
In early 2023, Joe joined Profitable Solutions, and his bookkeeper found $6,000 worth of contractor expenses he hadn’t accounted for. These expenses qualify as tax deductions, reducing his net self-employment income to $54,000.
With $54,000 in taxable self-employment income, Joe pays $7,630 in SE tax and $4,200 in income tax, totaling $11,830.
By identifying the $6,000 in contractor expenses, Profitable Solutions helped Joe save over $1,500 in taxes, which he can now use to upgrade his laptop.
Repeating this process for all available deductions can significantly reduce Joe’s taxable income, saving him thousands of dollars.
Staying on Top of Your Deductions
As a small business owner, knowing which deductions apply to you can be challenging. Many people struggle to keep track of their deductions throughout the year, often trying to piece things together at year-end, which can be problematic. Do you remember that restaurant expense from last January? Most people don’t, leading to missed tax write-offs. Over time, these missed deductions add up to substantial tax savings lost.
This is where bookkeeping becomes crucial. To claim deductions, you need accurate records and consistent monthly bookkeeping.
Ongoing bookkeeping is essential to tally your deductions. If you’re not satisfied with a DIY setup, consider Profitable Solutions. We handle your bookkeeping, catching deductions monthly to ensure you minimize your tax liability. At year-end, send Profitable Solutions records to your accountant, or let us handle your tax filing with Profitable Solutions small business tax support for a headache-free tax season.
The Top 17 Small Business Tax Deductions
Each of these expenses is tax-deductible. Use this checklist of small business tax write-offs, but remember that some deductions may not apply to your business. Consult your tax advisor or CPA before claiming a deduction.
Advertising and Promotion
Costs for advertising and promotion are 100% deductible. This includes hiring someone to design a logo, printing business cards or brochures, purchasing ad space, sending cards to clients, launching a website, running a social media campaign, or sponsoring events. However, lobbying or sponsoring political campaigns/events is not deductible.
Bank Fees
Separate bank accounts and credit cards for your business are a good idea. Deductible fees include annual or monthly service charges, transfer fees, overdraft fees, and merchant or transaction fees paid to third-party payment processors like PayPal or Stripe. Personal account fees are not deductible.
Business Meals
Generally, you can deduct 50% of qualifying food and beverage costs if the expense is ordinary and necessary, not lavish, and the business owner or an employee is present. Meals for employees (e.g., pizza for late work) and meals at office parties are 100% deductible. Keep detailed documentation of the expense.
Business Insurance
Deductible insurance premiums include property coverage, liability coverage, group health, dental, and vision insurance for employees, professional liability insurance, workers’ compensation, auto insurance for business vehicles, life insurance for employees (excluding policies where the business or owner is a beneficiary), and business interruption insurance.
Business Use of Your Car
If used solely for business, deduct the entire operating cost. If used for both business and personal trips, deduct only the business-related portion. Choose between the standard mileage rate ($0.655 per mile for 2023) or actual expense method. Track business miles meticulously and exclude commuting costs.
Contract Labor
Fees for freelancers or independent contractors are deductible. Send a Form 1099-NEC if you pay a contractor $600 or more during the tax year.
Depreciation
Depreciate the cost of business assets over their useful life rather than deducting the full cost upfront. Options include de minimis safe harbor election (expense assets costing less than $2,500 per item), Section 179 deduction (up to $1,080,000), and bonus depreciation (100% for certain property). For vehicles, depreciation limits apply.
Education
Fully deductible if it adds value to your business and improves your expertise. Includes classes, seminars, webinars, trade publications, books, workshops, and related transportation expenses. Excludes education for new careers or unrelated fields.
Home Office Expenses
Deduct a portion of housing expenses if you use a home office. Choose between the simplified method ($5 per square foot, up to 300 square feet) or the standard method (actual expenses multiplied by the business use percentage). Ensure regular and exclusive use and that it is your principal place of business.
Interest
Deduct interest on loans or credit used for business expenses if you are legally liable for the debt, intend to repay it, and have a true debtor/creditor relationship. Divide interest for mixed-use loans between business and personal portions.
Legal and Professional Fees
Deduct fees for necessary and directly related legal, accounting, bookkeeping, tax preparation, and online bookkeeping services like Profitable Solutions. Excludes personal-related fees.
Moving Expenses
Deduct the cost of moving business equipment, supplies, and inventory. Keep detailed records of all related costs.
Rent Expense
Deduct rental payments for business locations or equipment. Home rent is part of home office expenses, not a separate deduction.
Salaries and Benefits
Deduct salaries, benefits, and vacation time for employees, excluding the sole proprietor, partners, or LLC members. Ensure salaries are reasonable, ordinary, and necessary for actual services provided.
Taxes and Licenses
Deduct state income taxes, payroll taxes, personal property taxes, real estate taxes on business property, sales tax, excise taxes, fuel taxes, and business licenses.
Telephone and Internet Expenses
Deduct telephone and internet expenses integral to your business. For personal and business use, deduct the business-use percentage. Maintain itemized bills and detailed records.
Travel Expenses
Deduct travel expenses that are ordinary, necessary, and away from your tax home, requiring sleep or rest. Includes travel to/from destination, car use, parking/tolls, taxis, meals, lodging, tips, laundry, business calls, baggage shipping, and related expenses. Keep detailed records of each expense and trip details.
Personal Tax Deductions for Business Owners
These deductions are claimed on Schedule C or Form 1065’s Schedule K-1, but other common tax breaks for small business owners include:
- Charitable Contributions
Not deductible as a business expense but can be claimed on a personal tax return if donated to a qualified organization. Up to $300 can be claimed as an “above-the-line” deduction on Form 1040. For higher amounts, itemize deductions on Schedule A.
Child and Dependent Care Expenses
Claim the Child and Dependent Care Credit for care of a child (under 13) or dependent who cannot self-care while you work. The credit is 20%-35% of allowable expenses, limited to $4,000 for one dependent and $8,000 for two or more. Attach Form 2441 to Form 1040.
Retirement Contributions
Deduct contributions to employee retirement accounts as a business expense. The deduction amount depends on the plan type. Refer to IRS guidelines for calculations.
Health Care Expenses
Deduct out-of-pocket medical costs like co-pays and prescriptions on itemized deductions (Schedule A). Self-employed owners can deduct health insurance premiums for themselves, spouses, and dependents on Schedule 1 of Form 1040, unless eligible for a spouse’s employer plan.
Conclusion
Tax deductions are crucial for minimizing your tax bill, and good record-keeping ensures you retain these deductions if audited by the IRS. Have your dedicated bookkeepers at Profitable Solutions track all business-related expenses to maximize every legitimate deduction. Send Profitable Solutions records to your accountant at year-end, or let us handle your tax filing with our small business tax support for a stress-free tax season.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Profitable Solutions assumes no liability for actions taken in reliance upon the information contained herein.