If your business can take more tax deductions, its taxable profit will be lower. This means that you will have more money at the end of the year, and you may also be able to get some personal benefits, like a nicer car or a trip that combines business and pleasure. To make sure you can get all the deductions you’re entitled to, you need to know the IRS rules about what is and is not deductible.
At the end of the year, don’t forget to include these important business tax deductions in your calculation of your business’s expenses.
1. Business Meals
You can deduct 50 percent of food and drink purchases that qualify as business expenses. To qualify, the meal needs to be related to your business and you need to keep documentation of the meal, including the date, time, place, people present, and business purpose.
- Date and location of the meal
- Business relationship of the person or people you dined with
- The total cost of the meal
The easiest way to track business meal expenses is to keep your receipt and write down the details of the meal on the back of it.
2. Work-Related Travel Expenses
The conditions that must be met in order for a trip to be classified as work-related travel and therefore have all of its expenses be tax-deductible are as follows: first, the travel must be for the purpose of conducting business; second, the travel must involve sleeping away from home; and third, the travel must involve multiple distinct work locations. For a full list of deductible business travel expenses, you can refer to the IRS website. To qualify as work-related travel, your trip must meet the following conditions:
- The trip must be necessary to your business.
- The trip must take you away from your tax home, i.e. the city or area in which your company conducts its business.
- You must be travelling away from your tax home for longer than a normal work day and it must require you to sleep or rest on route.
The two methods of claiming expenses are: 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.
3. Work-Related Car Use
If you use your car solely for business, you can write off all the costs of running and maintaining it. If you use it for both business and personal reasons, you can only deduct the costs that relate to the business usage. This includes the mileage you rack up while driving for business purposes, which you can either deduct by itemizing the actual miles traveled, or by using the standard mileage deduction of $0.56 per mile.
4. Business Insurance
The expenses for your business insurance can be included in your tax return as a deduction. If you work from home or have a space in your residence dedicated to your business, the cost of your renter’s insurance can be included as part of the write-offs for your home office.
You are able to deduct the premiums you pay for any insurance you purchase for your business as a business operating expense, which would include:
- medical insurance for your employees
- fire, theft, and flood insurance for business property?
- 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. Home Office Expenses
The new guidelines from the IRS allow small businesses and freelancers who work from home to deduct $5 per square foot of their home used for business purposes, up to a maximum of 300 square feet. In order to qualify for this deduction, the work area must be used exclusively for business, and it must be the primary place where business is conducted.
6. Office Supplies
You may deduct office supplies including printers, paper, pens, computers and work-related software, as long as you use them for business purposes within the year in which they were purchased. You may also deduct work-related postage and shipping costs. File all receipts for office supply purchases for documentation.
7. Phone and Internet Expenses
If you rely on the phone and internet to run your business, you can deduct those expenses. However, if you use them for both work and personal reasons, you can only deduct the portion of the expenses that are for business use. For example, if half of your internet usage is for business, you can deduct 50% of your internet expenses for the year.
8. Business Interest and Bank Fees
If you want to deduct the interest you’re paying on a business loan or credit card come tax season, you can do so for both business loans and business credit cards. You can also write off any monthly service fees and annual credit card fees associated with your account.
If your business spends money on credit or through personal loans, the interest and carrying charges are tax-deductible. However, if your business profit is more than $25 million, only 30% of your interest expenses can be deducted.
9. Depreciation
You can deduct the cost of a big-ticket item like a car or machinery over the useful lifetime of that item by deducting depreciation. This is usually done for long-term business investments that are more costly, so the businesses are reimbursed for the expense over the entire useful lifetime of the item.
The depreciation of an asset is equal to the total cost of the asset divided by the useful lifetime of the asset.
10. Professional Service Fees
All professional service fees that your business needs to function, like legal, accounting, and bookkeeping services, can be deducted for taxes. This also includes any business software you use for bookkeeping or accounting. If you’re not sure if a particular professional expense is for work or personal use, the IRS has guidelines for legal and professional fees that can help you figure it out.
Pre-paid business expenses, like books that teach you how to operate without the help of legal or tax professionals, are tax deductible. Usually, you can deduct fees you pay to lawyers, tax professionals, or consultants in the year that you incur them.
11. Salaries and Benefits
You must have a formal written agreement with your employee, and the work they do must be in service of your business. If you’re a small business owner with employees, you can write off their salaries, benefits, and even vacation pay on your tax returns. However, there are a few requirements for writing off these expenses.
- The employee is not a sole proprietor, partner or LLC member in the business
- The salary is reasonable and necessary
- The services delegated to the employee were provided
12. Charitable Contributions
If you donate to a qualifying organization, you can deduct that on your taxes. If you are a sole proprietor, LLC, or partnership, you can claim that expense on your personal tax forms. If you are a corporation, you would claim that charitable donation on your corporate tax return.
If your business is a partnership, limited liability company, or S corporation, it 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 have old computers or office furniture, you can give them to a school or nonprofit organization. This will create goodwill and you will also get a tax benefit.
13. Education
If you spend money on courses or workshops that improve your skills for your job or business, you can deduct the entire expense on your taxes. The requirements for education-related expenses are that the course or workshop must improve your skills or help maintain your professional expertise. Educational expenses that qualify for deductions include:
- Courses and classes related to your field of work
- Seminars and webinars
- Trade publication subscriptions
- Books related to your industry
14. Child and Dependent Care
The amount of money you spend on taking care of either children or adults who rely on you financially is something you can write off when doing your taxes. For children that are twelve years old or younger, any costs associated with their care can be deducted. This also applies to adults who depend on you, such as a spouse or other related adult who is not able to take care of themselves because of a physical or mental disability.
15. Energy Efficiency Expenses
Upgrades that make your home more energy efficient can qualify for a tax credit of 30 percent of the cost of the alternative energy equipment. This includes solar panels, solar water heaters, and wind turbines. The IRS website has more information on these home energy tax credits.
16. Investments
If you borrow money for the purpose of investing it, you can write off the resulting interest payments as a deduction, up to the amount of investment income earned.
17. Foreign-Earned Income Exclusion
If you are an American citizen with a business based in a foreign country, you may be able to exclude some of the income you have earned from your tax return. To qualify for the exclusion, your tax home must be based in a foreign country. Look for additional articles that can help you better understand the requirements for the foreign-earned income exclusion.
18. Medical Expenses
If you’re self-employed, you can deduct both your health insurance and dental care insurance premiums, as well as any medical care expenses, including doctor’s fees, prescription drugs, and home care.
19. Real Estate Taxes
Real estate taxes paid to the state and local government can be deducted from your income taxes. This deduction includes property taxes, and you can claim up to $10,000 total.
20. Mortgage Interest
If you use your home for business purposes, you can deduct interest payments made toward mortgage loans to buy, construct, or improve your home. You can also deduct the interest on loans taken out against your home equity.
21. Moving Expenses
You can deduct the cost of your move if it’s work-related and you pass the distance test, which requires your new job location to be at least 50 miles farther from your old home than your previous job location was from your new home.
22. Retirement Contributions
If you contribute to an Individual Retirement Account, it helps reduce your taxable income for the year. Your total IRA contributions can’t exceed the total income you earned that year or the annual maximum contribution, whichever is less.
23. Advertising and Promotion
Business promotion expenses, including digital and print advertising, website design and maintenance, and the cost of printing business cards, can be fully deducted.
You can deduct the cost to advertise your goods or services, like websites or business cards, as a current expense. You can also deduct the cost of promoting your business to create goodwill, as long as there is a clear connection between what you’re promoting and your business. For example, you can deduct the cost of sponsoring a peewee football team.
24. Client and Employee Entertainment
If you want to deduct the cost of taking business clients out, you need to discuss business during the meeting and the entertainment must take place in a business setting. You can deduct 50% of the cost as long as it was for business purposes. You can also deduct 100% of the cost if the event was held for your employees.
25. Startup Expenses
If you started a new business in the last tax year, you can deduct up to $5,000 in startup expenses that you incurred leading up to your business launch. That can include marketing your new business, travel, and training costs.
26. Pass-Through Tax Deduction
The Tax Cuts and Jobs Act created a new tax deduction for individuals who earn income through pass-through businesses, such as sole proprietorships, partnerships, S corporations, and certain trusts. 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?
- limited liability company (LLC), or
- limited liability partnership (LLP).
Each pass-through business that an individual owns may allow them to deduct up to 20% of their net income from it. This deduction is in addition to any other deductions they may have for their business. This deduction is scheduled to last from 2018 to 2025.
27. Equipment
The Tax Cuts and Jobs Act brought about changes that allow most small businesses to deduct the full cost of equipment in one year.
80% for property placed in service after December 31, 2022, and 60% for property placed in service after December 31, 2023. After 2023, the deduction is not available. For personal business property placed in service from September 27, 2017 through December 31, 2022, the entire cost can be deducted in one year through bonus depreciation. After 2022, the deduction amount goes down, as follows: 80% for property placed in service after December 31, 2022, and 60% for property placed in service after December 31, 2023. The deduction is not available after 2023. 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.
How Do Business Tax Deductions Work?
The amount of tax you owe to the government can be lowered by taking business tax deductions. To get the most deductions, it is a good idea to speak to a professional, such as a certified public accountant (CPA). They are knowledgeable about available deductions and how they can be used for small businesses. The information above is for educational purposes and a qualified tax professional should always be consulted when preparing income tax returns.