Running a small business is no easy endeavor — especially during tax season. In addition to dealing with complicated forms and financial calculations, many small businesses end up paying too much in taxes because they take all of the deductions available to them.
We want to help you keep your tax bill as low as possible in 2019. Below, we’re going to give you the rundown on 25 of the most common small business tax deductions you could be eligible for as a sole proprietor, LLC, or partnership business. Please note that this post is for educational purposes. You should speak to a professional tax advisor to confirm which deductions you’re eligible to claim and learn how.
#1 Your Workspace
Whether you work in your own home office, a co-working space, studio, a traditional office or storefront, the associated expenses are fully deductible.
If you want to deduct for a home office, your space must first meet two requirements. First, the room has to be regularly and exclusively used as an office space. Secondly, the office has to be the principal place of your business.
If your home office qualifies, there are two ways to calculate your deduction:
The Simplified Option- You can deduct $5 per square foot of your office up to 300 ft. You can also deduct mortgage interest and real estate taxes—but not depreciation— on this area of the home on Schedule A.
The Regular Method- You need to calculate the percentage of your home that your office occupies and determine the expense of that space. Make sure you can provide records of how you arrived at your calculations. Associated costs like mortgage interest and real estate taxes are also allowed, plus depreciation.
Whichever method you choose, deducting for your home office is a no-brainer way to lower your tax burden.
#2 Mortgage Interest
If your business owns real estate, your mortgage interest is fully deductible. There is no cap on the size of loan and interest for small businesses. Sometimes, small businesses prepay the interest from the settlement date to the closing date. In this case, you need to allocate the interest over those designated tax years.
#3 Vehicle Expenses
Many small businesses use cars, trucks, or vans for transportation or deliveries. These vehicles and their associated costs can be deducted from your taxable income. Whether you own or lease the vehicle, you can opt to deduct a standard mileage rate for the business, charitable, medical, or moving expense purposes. The business rate for 2018 was 54.5 cents per mile. You cannot, however, deduct for trips between your work and home.
Be sure to keep careful records of when the vehicle was used, for what purposes, how many miles were driven. Keep records of oil changes and any other maintenance fees for your vehicles.
#4 Travel Costs
Sending yourself or employees on business trips is fully deductible. Just make sure you keep receipts for everything! The cost of transportation—airfare, taxi fares, train tickets etc.—is fully deductible, while meals are 50% deductible. In the past, entertainment for clients or employees was deductible, but as of January 2018, these costs will not reduce your taxable income.
#5 Salaries and Additional Payments
Small businesses face the challenge of employee costs rising as the company grows. Luckily for owners, employee salaries, wages, bonuses, commissions and taxable fringe benefits can reduce taxable income. However, owners themselves cannot deduct their own salaries if they’re the business’ sole proprietor, partner, or LLC member.
#6 Freelance or Independent Contractor Labor
Many small businesses count on freelancers or independent contractors for labor. Their costs can be deducted similar to employee salaries and wages, but need to be categorized differently. You also need to make sure you issue a 1099 form to any freelancers or independent contractors you employ.
#7 Fringe Benefits
Employee benefits, such as health care, educational funding, cars, childcare, contributions to retirement plans, gifts, and more are deductible. Self-employed individuals can also deduct their own contributions to certain retirement accounts using Form 1040.
Some benefits have caps or limitations. For example, contributions to employee Health Savings Plans are limited to $6,900. Child care assistance is tax-free up to $5,000 but employees need to know that they cannot use a child care tax credit if they receive employer support. They must decide between one or the other.
Investments in continued education for employees can be written off up to $5,250 per year for tuition, fees, and books.
#8 Employee Events, Retreats, Team Bonding Activities, etc.
Investing in staff happiness reduces employee turnover, which is why lots of small businesses hold events, retreats, and other bonding activities for employees. The IRS recognizes these as legitimate expenses, meaning that they’re tax deductible as long as you can provide a record showing that event primarily benefits employees. Meals, however, are only 50% deductible.
#9 Professional Services and Legal Fees
Many small businesses outsource professional services in areas like accounting, tax services, and legal services. You can deduct these costs from your taxable income by filing them on Schedule C or C-EZ.
#10 Advertising and Marketing
Advertising and marketing are practically necessary for reaching new customers in today’s economy. Luckily, the IRS recognizes this, and makes these expenses fully deductible -- this includes costs associated with your website, business cards, promotional materials, and any other advertising you purchase. However, no political advertising contributions are considered deductible.
#11 Computer Software
Almost every business needs computer software today, but the good news is that you can deduct the costs from your taxable income. If your computer and all the software on it are used only for professional purposes, than the entire system is fully deductible. If the computer is used for both professional and personal purposes, than you have to reduce the deduction to cover only the professional. Be sure to keep detailed records of the software you buy for work and how you use it in order to protect yourself in the event of an audit.
Purchased or rented equipment is partially or fully deductible. This includes any equipment necessary to run your business, such as computers, cell phones, printers, lawn equipment, and more depending on the type of company you run.
#13 Depreciation of Equipment
You can also deduct for the depreciation of the equipment you use for your business, in order to account for wear and tear or obsolescence. The equipment in question just has to be owned by your business, used in income-producing activity, and have a usage life of more than one year. You can use Form 4562 to report depreciation expenses.
#14 Office Supplies
Office supplies can also be written off. Don’t overthink what office supplies are. They’re simply the items necessary for an office to function, including paper, pen, pencils, folders, paperclips, USB thumb drives, ink cartridges, places to keep supplies, cleaning supplies, stamps and more. You can even deduct for small pieces of office furniture such as desks and chairs. If any of your office supplies cost over $2500, you can work with a tax preparer to calculate and claim its depreciation value each year.
#15 Office Expenses
Office expenses are categorized differently than office supplies, and refer to ongoing expenses that a running office accrues over time—internet bills, website hosting fees, monthly costs for cloud-based services, security fees, etc.
The IRS distinguishes between tools and equipment. Tools aren’t typically as expensive as equipment, and often only have a usage life of a year or less. Tools can include hammers, paintbrushes, spatulas, baking sheets, and other items necessary for your business.
We all know what utilities are—electricity, gas, heat, trash removal, water, etc.. If you use a home office, you need to calculate the percentage of your home’s utilities used by your business.
#18 Startup Expenses
Startup costs can become tax deductible once your business has actually opened. All of the costs related to getting your business off the ground can qualify, such as employee training, travel costs to locate suppliers and distributors, and organizational costs.
Most common types of business insurance are tax deductible, including property insurance, casualty insurance, and workers’ compensation insurance. You can read Chapter 8 of IRS Publication 334, the tax guide for small businesses, to see which types of insurance are and are not deductible.
#20 Bank Fees for Business Accounts
ATM fees and bank service charges are a deductible miscellaneous expense for small businesses. Self-employed individuals will find it helpful to keep business and personal accounts separate to be able to keep monthly tabs on any fees accrued.
#21 Other taxes
Small businesses can deduct many non-federal business-related taxes from their taxable income. This includes sales taxes, city and state taxes, and the employer portion of payroll taxes. However, these taxes can only be deducted in the year they were paid.
#22 Bad Debts
Bad debt is any debt owed to you by a customer or client that goes unpaid. While you can always try taking someone who owes you to small claims court, the reality is that some bad debts are simply never going to be paid. While it’s not ideal, you can use bad debts to reduce your tax liability if you’ve already listed the amount due as business income.
#23 Interest on loans
The IRS allows you to deduct interest on business-related loans as long as you are legally liable for the debt, are making payments which are being deposited by the lender, and it is a legitimate loan from a creditor. Loans between family members don’t count.
#24 Disaster and Theft Loss
Did a hurricane, fire, or earthquake cost you? The government will allow you to deduct any losses that your insurance company did not compensate you for. Theft loss is also deductible.
#25 Charitable Deductions
Just like individuals, businesses also receive tax breaks for charitable giving, as long as the organization is qualified to receive tax-free donations. Businesses can donate in the form of cash, in-kind donations, or transportation. You cannot, however, try to deduct man hours offered by staff to volunteer organizations. Charitable donations can be listed as business expenses, and self-employed individuals must deduct charitable giving from their personal expenses.