The Top Tax Deductions for Your Small Business

Using these tax deductions for your small business can save you money.

By , J.D.

It's simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. In addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a smaller cost, or a combination business trip and vacation. So, it's advantageous to pay careful attention to IRS rules on just what is—and isn't—deductible.

When you're totaling up your business's expenses at the end of the year, don't overlook these important business tax deductions.

1. Auto Expenses

If you use your car for business or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky but well worth your while.

The two methods of claiming expenses are:

  • Actual expense method. You keep track of and deduct all of your actual business-related expenses and deduct an amount for depreciation each year.
  • Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees.

As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle up to an annual limit. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. If you use the standard mileage rate the first year, you can switch to the actual expense method in a later year. But you can't switch back to the standard mileage rate if you claimed accelerated depreciation deductions when you used the actual expense method or took bonus depreciation or a Section 179 deduction for the vehicle. (For more on bonus depreciation and Section 179, see "New Equipment" below.)

If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business. GPS-based apps are available that allow you to keep track of your driving, or you can use a paper logbook.

2. Expenses of Going Into Business

Once you're running a business, expenses such as advertising, utilities, office supplies, and repairs can be deducted as current business expenses—but not before you open your doors for business. The costs of getting a business started are capital expenses, and you may deduct $5,000 the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years (180 months).

If you expect your business to make a profit immediately, you might be able to work around this rule by delaying paying some bills until after you're in business or by doing a small amount of business just to officially start. However, if, like many businesses, you'll suffer losses during the first few years of operation, you might be better off taking the deduction over five years, so you'll have some profits to offset.

3. Books and Legal and Professional Fees

Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.

Fees you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. But if the work clearly relates to future years, they must be deducted over the life of the benefit you get from the lawyer or other professional.

4. Insurance

You can deduct the premiums you pay for any insurance you buy for your business as a business operating expense, including:

  • medical insurance for your employees
  • fire, theft, and flood insurance for business property‚Ä®
  • credit insurance that covers losses from business debt
  • liability insurance
  • professional malpractice insurance—for example, medical or legal malpractice insurance
  • workers' compensation insurance that state law requires you to provide to your employees
  • business interruption insurance
  • life insurance covering a corporation's officers and directors if you're not a direct beneficiary under the policy, and
  • unemployment insurance contributions (either as insurance costs or business taxes, depending on how they're characterized by your state's laws).

5. Travel

When you travel for business, you can deduct many expenses, including the cost of plane fare, costs of operating your car, taxis, lodging, meals, shipping business materials, cleaning clothes, telephone calls, and tips.

What about combining business and pleasure? It's okay, as long as business is the trip's primary purpose. But if you take your family along, you can deduct only your own expenses.

6. Interest

If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. The same is true if you take out a personal loan and use the proceeds for your business. However, if your business profit is more than $25 million, you'll only be able to deduct 30% of your interest expenses. Real property businesses with more than $25 million in gross receipts may elect out of the 30% limitation by agreeing to depreciate their real property over a somewhat longer period. Be sure to keep good records demonstrating that the money was used for your business.

7. Equipment

Due to changes the Tax Cuts and Jobs Act (TCJA) brought about, most small businesses are able to deduct 100% of the cost of equipment in a single year. This deduction may be done by using 100% bonus depreciation, expanded Section 179 expensing, and the $2,500 de minimis deduction. These deductions may be used for tangible personal property and computer software, but not real property, which must be depreciated over many years.

For used or new personal business property placed in service from September 27, 2017 through December 31, 2022, 100% of the cost may be deducted in a single year through bonus depreciation. In later years, the first-year bonus depreciation deduction amount goes down, as follows:

  • 80% for property placed in service during 2023
  • 60% for property placed in service during 2024
  • 40% for property placed in service during 2025
  • 20% for property placed in service during 2026
  • 0% for property placed in service 2027 or later.

In addition, under Section 179 of the Internal Revenue Code, you can currently deduct up to an annual threshold amount of the cost of equipment and certain business assets you purchase and place in service that year and use over 50% of the time for your business (not personal use). The Section 179 annual limit is $1,080,000 for 2022 ($1,050,000 for 2021).

In addition to the annual limit, a phase-out applies to how much property can be deducted under Section 179 that starts when a business purchases more than $2.7 million in business property in a year ($2.5 million for 2021). Once this annual investment limit is reached, the amount you can deduct under Section 179 is reduced dollar for dollar by the amount your purchases exceed the limit.

Finally, using a provision of the tax law called the "de minimis safe harbor," a business may deduct in a single year any tangible personal property that costs $2,500 or less, as stated on the invoice. You must file an election with your tax return to use this deduction.

8. Charitable Contributions

If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.

If you've got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. But if the equipment has been fully depreciated (written off), you can't claim a deduction.

9. Taxes

Taxes incurred in operating your business are generally deductible. How and when they're deducted depends on the type of tax:

  • Sales tax on items you buy for your business's day-to-day operations is deductible as part of the cost of the items; it's not deducted separately. However, tax on a big business asset, such as a car, must be added to the car's cost basis.
  • Excise and fuel taxes are separately deductible expenses.
  • If your business pays employment taxes, the employer's share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn't a business expense.
  • Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense. But the annual personal itemized deduction for state and local taxes is limited to $10,000.
  • Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement—for example, to build a sidewalk—it isn't immediately deductible; instead, it is deducted over a period of years.

10. Education Expenses

You can deduct education expenses if they're related to your current business, trade, or occupation. The expense must be to maintain or improve skills required in your present business. (The cost of education that qualifies you for a new business or trade isn't deductible.)

11. Advertising and Promotion

The cost of ordinary advertising of your goods or services—websites, business cards, Google Adwords, and so on—is deductible as a current expense. Promotional costs that create business goodwill—for example, sponsoring a peewee football team—are also deductible as long as a clear connection exists between the sponsorship and your business. For example, naming the team the "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort.

12. Pass-Through Tax Deduction

The TCJA created a new tax deduction for individuals who earn income through pass-through businesses, such as a:

  • sole proprietorship (a one-owner business in which the owner personally owns all the business assets)
  • partnership
  • S corporation‚Ä®
  • limited liability company (LLC), or
  • limited liability partnership (LLP).

Such individuals may deduct an amount up to 20% of their net income from each pass-through business they own. This deduction is in addition to all their other business deductions. The pass-through deduction is a personal deduction pass-through owners can take on their returns whether or not they itemize. This deduction is scheduled to last from 2018 through 2025.

However, this deduction is limited for people whose business is providing personal services, including people providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading and dealing in securities or commodities, or any business where the principal asset is the reputation or skill of one or more of its owners (but there is an exception for architects and engineers). A business owner who provides such services is entitled to the 20% pass-through deduction only if their 2022 taxable income from all sources after deductions is less than $340,100 if married filing jointly, or $170,050 if single ($329,800/$164,900 for 2021). The deduction is phased out if income exceeds the $340,100/$170,050 limits ($329,800/$164,900 for 2021). It disappears entirely for marrieds filing jointly whose income exceeds $440,100 and for singles whose income exceeds $220,050 ($429,800/$214,050 for 2021).

If you're not involved in providing services, you can still qualify for a pass-through deduction if your business income exceeds $440,100/$220,050 ($429,800/$214,900 for 2021), but it is subject to a special limit: Your deduction can't exceed (1) 50% of your applicable share of the W-2 employee wages paid by the business, or (2) 25% of your share of W-2 wages, plus 2.5% of the original purchase price of the long-term property used in the production of income—for example, the real property or equipment used in the business.

This deduction is scheduled to end on January 1, 2026.

Easily Overlooked Business Expenses

Here are some additional routine deductions that many business owners miss (keep your eye out for them):

  • bank service charges
  • business association dues
  • business gifts (limited to $25 per gift)
  • business-related magazines and books
  • casual labor and tips
  • casualty and theft losses
  • coffee and beverage service
  • commissions
  • consultant fees
  • credit bureau fees
  • office supplies
  • parking and meters
  • petty cash funds
  • postage
  • seminars and trade shows, and
  • taxi, bus, and Uber-type fares.

Note: Just because you didn't get a receipt doesn't mean you can't deduct the expense, so keep track of those small items.

For More Information

To learn all the ins and outs of the tax code and start saving on your business taxes, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

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