Small business tax deductions are important for a small business owner, as the individual constantly requires to maximize profits and keep hard-earned money with the self. If you want to keep more of your money and maximize profits, your will need to look for various options of tax deductions provided to you in the United States.

In this article, you will learn the various tax deduction options available for small businesses. However, before that, we will also discuss some of the most important aspects of tax deductions. In regard to the tax deduction options, we have also provided details on whether you qualify for a particular small business tax deduction or not. Hence, to find out, read on through to the end of the article.

How Do Small Business Tax Deductions Work?

According to the official site of FreshBooks,

“Business tax deductions work by lowering your taxable income, thereby lowering the amount of tax you owe to the government as part of your tax return. To find out how to claim the most deductions possible, it’s a good idea to consult a professional, like a CPA. It’s the job of an accountant to know what tax deductions are available and how they can apply to your small business.”

As per the Tax Cuts and Jobs Act 2018, there are many ways in which small businesses, entrepreneurs, and freelancers can get tax deductions for their businesses at the time of filing income tax:

1. Health insurance premiums
2. Car expenses and mileage
3. Vehicle parking for trips related to business
4. Office supplies, including computers, application software systems, etc.
5. Business phone bills
6. Office expenses, including rent, utilities, etc
7. Travel expenses, including flights, rental cars, hotels, etc., that are directly related to business
8. Continuing education courses for business purposes
9. Postage

Another really helpful tax deduction method is the hundred percent tax deduction. Here, if you make an expense for business, you will be able to claim 100% of your income taxes. Here are some of the major expenses for which you can claim a hundred percent of the tax:

1. Furniture items that you have purchased for office-use entirely
2. The purchase of office equipment, such as computers, printers, etc.
3. Costs for business travel, including hotels, car rentals, etc.
4. Gifts that you make towards clients and employees, up to US $25 per person per year
5. On Health Premiums (only if you are a self-employed individual)
6. Annual phone bills for business

Furthermore, if you want to report your income sources apart from your employment, you will need to use the 1099 form provided by the IRS. According to FreshBooks.com,

“1099 is an IRS tax form that’s used to report any income earned through sources other than employment, so independent contractors, freelancers, and self-employed workers use the 1099 form. You can find out more about the 1099 tax form on the IRS site.”

In addition to that, the law also offers you to write off your state and local taxes in the year of payment, even if these taxes belong to the previous year. However, you do not get the option to write off the federal taxes which you paid for the last year.

What Are The Major Types Of Small Business Tax Deductions?

According to Investopedia,

“It is important to note that tax laws are constantly changing, and these provisions may be modified or extended at any point before 2025. Therefore, reviewing the most common self-employed taxes and deductions is necessary to keep you updated on any changes required to your quarterly estimated tax payments.”

The following are the major tax deduction provisions available to small businesses in 2023:

1. Home Office Deductions

The home office tax deduction is applicable only if the home office is exclusively used for the business. The home office expense can be the cost of any workspace that you regularly use for your business and not for any other purposes. The expense can be rent or ownership.

You can get deductions for your rent, mortgage, property tax, insurance, and other utilities as well. There are two methods of deduction – the simplified method and the straight-line method. Although this deduction looks complex, but it is not if you look at it carefully.

Furthermore, here Investopedia adds –

“If your home office occupies 15% of your home, 15% of your annual electricity bill becomes tax deductible. However, some of these deductions, such as mortgage interest and home depreciation, apply only to those who own rather than rent their home office space.”

2. Using The Car For Business

If you use your car for business purposes, you will get tax deductions too. However, there are two ways of deducting taxes for the expenses of your vehicle. On one of the ways, you can calculate the mileage, while on the other, you can calculate the actual vehicle expense. With this, you can deduct the cost of your vehicle too.

These tax deductions are also possible for vehicle insurance, gas, registrations, repairs, maintenance, and more. If you want to qualify for this deduction, you will need to keep track of your personal mileage as compared to your business mileage and keep the documentation separate. This will help you to find the percentage better with your business mileage.

3. For Offering Wages And Benefits To Employees

One of the major growth factors for your business is the number of employees that are working in your organization. The number of employees can help you determine your business growth and scale it. However, a lot of business owners are afraid to hire more employees because of increased costs. Despite that, there is a difference between the cost of hiring an employee and a contractor.

For employees, you will need to pay only half of the Medicare and Social Security. Furthermore, the taxes that you pay for the wages are deducted from the business. Furthermore, you can also write off taxes for health insurance premiums, contributions, retirement plans, parties, team meetings, etc.

4. Expenses For Business Travel

According to FreshBooks.com,

“All expenses related to business travel can be written off at tax time, including airfare, hotels, rental car expenses, tips, dry cleaning, meals and more. You can reference the IRS website for a full list of deductible business travel expenses.”

To get tax deductions on your travel expenses, you will need to ensure that you have spent more than half of your domestic travel days in activities related to your business.

The types of expenses that you can deduct include airfare, train fare, hotels, lodging, meals, and other transportation costs, etc. However, like the rest of the options, you will need to ensure here that all your expenses are directly related to your business and are not your personal or family expenses.

5. Expenses For Office Supplies And Equipment

There can be different types of office supplies for your business. Some of the supplies that are required for the office include small accessories, computers, printers, telecommunication devices, etc. Furthermore, many businesses also spend on other things like artwork, plants, flowers, boards, decorations, markers, journals, notepads, pages, charging cables, lightwork, etc.

If you keep all the receipts for your purchases, you will get tax deductions to prove your expenses to the IR at the time of filing the taxes. However, you have to ensure that these are used for purposes related to your business only. In addition to that, you also have the option to deduct work-related postage, as well as the costs of shipping.

6. Advertising And Marketing For Business

Marketing and advertising expenses are common for small businesses. However, as a small business owner, you have a budget for those actions that you take from your business end. For the aforementioned expenses, you will have the option to deduct taxes for your advertisement and marketing expenses. These expenses include website design, promotions, and associated costs.

Furthermore, a lot of the marketing and advertisement of companies is done on social media platforms. The costs that you incur to produce and edit such videos also come under business expenses, like hiring photographers, videographers, professionals for editing, equipment, renting a studio, and other related expenses. All these expenses are eligible for tax deductions as well.

7. Fees Paid To Lawyers, Accountants, And Professionals

If you take services from professionals such as lawyers, accountants, consultants, etc., you are required to pay taxes with their fees as well. However, the law allows you tax deductions for small business expenses too. However, your attorneys and tax strategists should be helping you in this regard to save your taxes.

If the professionals you hire for your business do not bring tax-saving ideas to you, it might be due to the fact that the tax laws are always changing, and they are not able to keep up. Hence, you must always be aware of the tax deductions related to the professionals that you hire for your business. However, these professionals, like lawyers, accountants, etc., must be hired solely for your business.

8. Payment For Rents And Lease

Let’s say that you will have to pay for your rent, or perhaps you will lease your business space. You will need to know here that the law allows you to deduct taxes on your rent and lease payments. These rules are applicable to vehicles too. With the help of Augusta Rule too, you can get rent from your business if you run a business from your house.

According to Forbes.com,

“As long as your primary place of business is not your personal residence, you can use your house for 14 days or less per year for business events or meetings. Your business would pay you rent, and it is a business expense to the business and tax-free to you.”

Here, you will need to consult your tax strategist in this case if you want to keep records of your business payments and similar expenses.

9. Taxes On Depreciation

Your business’ assets depreciate with time, such as machines, equipment, vehicles, and more. Due to depreciation, the tax law allows you to deduct a portion of that every year. You cannot expense any asset in your business over US $2500. You will need to depreciate the asset rather.

You can thus recover the cost of the asset over time as it depreciates. You will need to discuss with your accountant above the Bonus Depreciation and Section 179 Depreciation, as using these rules, you shall be able to save millions of dollars that you pay as taxes.

10. All Insurances Related To Business

Taxes are applicable to insurance premiums people pay. However, if you are a small business owner, you will not need to pay taxes for your insurance premiums. Insurances such as property insurance, health insurance, E&O insurance, vehicle insurance, liability insurance, worker’s compensation insurance, and other major types are required for business.

Finally, Forbes.com recommends –

“Remember that it’s important to keep accurate records and follow the tax code to ensure you’re eligible for these deductions. Consult with a tax professional if you have any questions or concerns about your eligibility for these deductions.”

Since there are many tax deductions available, you can thus reduce the liability of those taxes and save money with the tax write-offs available. Basically, as you ensure proper planning and organization, you shall be able to save money on your taxes. You can then invest those savings back into your business to ensure its growth.

Bottom Line

You can see that the Tax Cuts and Jobs Act has made many changes to tax deductions for small business owners. If you are a small business owner, you will need to review what you can deduct from your tax every year if you want to make your business more profitable.

For example, if you want to make tax deductions for your home office or your business vehicles, you can calculate it in two ways. In both ways, tax deductions are possible. Do you think the tax deduction options shall be kept beyond 2025? Share your opinions on the matter in the comments section below.

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