If you are a business owner, a portion of your revenue is spent on expenses needed to run your business. However, not all of these business expenses are tax deductible. For a business expense to qualify as a tax deduction, this type of expense must be ordinary and necessary for your business. This IRS criteria is in place to ensure that business owners are not incurring unnecessary expenses to take additional business tax deductions. An ordinary business expense is any expense that is common and accepted in your trade or business. A necessary expense is any expense that is helpful and needed to run your business operations.
To ensure you are not missing out on any business expenses that qualify as a tax deduction, check out this small business tax deductions checklist. These eligible tax deductions may vary depending on your business structure, but the ones listed here are most common for businesses filing a Schedule C (Sole Proprietorship).
Small Business Tax Deductions Checklist
1.) Advertising/Marketing
Most small businesses pay for some form of advertising or marketing to promote their business. Whether you pay for ads, photos, website creation, etc, all of these expenses are considered tax deductible. Some additional advertising expenses that are tax deductible include digital marketing ads/campaigns, website development and maintenance, business cards, business photos, etc.
2.) Employees (W2) and Contract Labor (1099 Contractors)
Any fees, salaries, and/or wages associated with hiring a W2 employee or 1099 contractor are all tax deductible. It is essential to keep thorough records of all payments, benefits, and tax filings for both types of workers.
3.) Interest (Loans, etc.)
As a business owner, certain types of interest are tax-deductible if they meet IRS criteria. Keep in mind that principal balances on any loans are never tax deductible. Some examples of tax-deductible interest include business loan interest, mortgage interest on business property, business credit card interest, and business investment interest.
4.) Bank and Merchant Account Fees
If your business bank account charges monthly or one-time fees, these types of fees are considered tax deductible. In addition, if you use a payment processor such as Stripe, Square, etc. to collect fees, then you may incur some processing fees that are tax deductible. Whether you write off these expenses or not depends on whether you receive payments net of these fees or if these fees are remitted after the full payment is received.
5.) Legal and Professional Services (Lawyers, Accountants, etc.)
There are an array of legal fees that may be tax deductible including fees associated with business formation, contract review and drafting, business attorney fees, compliance fees, etc. Any legal fees related to personal matters are not tax deductible.
Some of the accounting and bookkeeping fees that are tax-deductible include tax preparation, bookkeeping, auditing, and consulting services.
6.) Office Supplies
Some of the most common tax-deductible office supplies include paper, pens, filing supplies, stationery, etc. As long as all supplies are used for business and not personal purposes, these supplies are all tax deductible.
7.) Office Expenses
Similar to office supplies, office expenses can be anything needed to keep your office functioning. This can include computer software, domain names, computers, etc. Be aware that higher-priced office expenses may need to be depreciated instead of expensed.
8.) Office Rent or Lease vs. Home Office Deduction
Whether you pay for a physical office space or work from home will determine the tax deductibility of certain expenses. All of the office expenses that relate to a physical office space are tax deductible. However, if you have a home office, you can only deduct a percent of your home office expenses based on the part of your home used exclusively for business purposes.
For example, if you pay for internet at a physical office space, these payments are fully tax deductible. However, if you have a home office and use the same internet for personal and business use, then only a portion of this expense is tax deductible. To calculate the home office deduction, you will need to divide the square footage of your home office by the total square footage of your home.
In addition, if you have both a physical office space and a home office space, you cannot take advantage of both the rent/lease tax deductions and the home office deduction.
9.) Continuing Education
Depending on your business, you may incur costs that help you maintain or improve your or your employee’s current skills. As long as these expenses are related to your current business, they will be a qualified tax deduction on your Schedule C. Some of these expenses may take the form of classes, seminars, courses, books, webinars, etc. Keep in mind that any personal education expenses that are not related to your business are not tax deductible.
10.) Licenses
The cost of any licenses required for your business or profession is often tax-deductible. These licenses must be necessary to operate your current business. Some of these licenses that are tax-deductible include business permits, professional licenses, industry-specific licenses, and regulatory fees/licenses.
11.) Business Insurance
Many business insurance premiums are tax-deductible as necessary business expenses. Qualifying types include general liability, professional liability (errors and omissions), business property, product liability, and cyber liability insurance, among others. There are a multitude of additional insurance deductions that are available if you pay for additional benefits for W2 employees.
12.) Travel and Meals
Business owners can deduct travel and meal expenses directly related to their business, but the IRS has specific rules on what and how much is deductible. To learn more about specific business meal tax deductions, check out our Business Meals Tax Deduction Guide.
Some of the common business travel expenses that are deductible include transportation costs (airfare, taxis, mileage), lodging and meals, and incidental expenses (tips, parking, etc.). Keep in mind that for these types of expenses to be tax deductible, you must keep detailed records and receipts, and the purpose of the trip must be business-related. In addition, if the trip is partially personal, only the proportion of time spent on business activities can be deducted.
13.) Utilities (Physical Office vs. Home Office)
If you rent or own office space outside of your home, you can generally deduct 100% of the utilities used for that office. Some of these utility expenses include electricity, water, gas, heating, internet, and phone services.
If you work from home and have a dedicated home office space, you can write off a portion of your utilities through the home office deduction. There are two methods that you can use to calculate this deduction: The Simplified Method or The Actual Expense Method. The simplified method does not require you to calculate actual expenses; however, this method may result in a smaller deduction if you have high utility costs. The actual expense method requires more calculations since you will be able to deduct a percent of the expense based on the size of your home office relative to your entire house. You can only take the home office deduction if this is your primary place of business and you do not own or rent a physical office space.
14.) Depreciation Deduction (Sec. 179)
The Section 179 depreciation deduction allows business owners to deduct the full purchase price of qualifying equipment and software in the year they place it into service, instead of depreciating it over several years. This can provide significant tax savings during years you are making large purchases upfront.
To be eligible for the Section 179 deduction, assets must include tangible property used for business, such as equipment (machinery, computers, etc.), vehicles, software, and certain office building improvements.
15.) Cost of Goods Sold
The Cost of Goods Sold (COGS) is a key tax deduction for businesses that sell products. This expense refers to the costs incurred from producing or purchasing the goods that a business sells during a tax year. By accurately keeping track of your cost of goods sold and including this expense on your tax return, you can accurately reflect the true cost of producing your business goods or products. Some of the included costs in costs of goods sold include inventory costs, labor costs (directly associated with production), supplies/overhead, shipping and handling, storage, etc.
Other things that reduce your taxable income as a business owner that are not a qualified business expense:
Health Insurance Premiums
While health insurance premiums (any policies you pay for on the open market) are not tax-deductible business expenses on Schedule C, this is still an above-the-line deduction on your individual tax return.
QBI (Pass-Through Deduction)
Due to the Tax Cuts and Jobs Act (TCJA) this may be an eligible deduction for businesses from 2018 to 2025. The Tax Cuts and Jobs Act is set to sunset in 2025. The qualified business income (QBI) deduction is a tax break for pass-through businesses. This deduction allows businesses to deduct up to 20% of their qualified business income or taxable income (whichever is less).
Self-Employed Retirement Plan Contributions
Any contributions made to a self-employed retirement plan (SEP IRA, Solo 401(k), SIMPLE IRA, etc.) will reduce your taxable income as well. Keep in mind that only pre-tax contributions to any one of these accounts will reduce your taxable income.
Final Thoughts
As you can see, there are a wide array of tax deductions available for small business owners. This small business tax deductions checklist only covers some of the more common tax deductions. In order to ensure you are taking advantage of all of the deductions accessible to your industry or line of business, it is critical that you work with a CPA or tax professional. These professionals can help to create a tax plan or tax projection for your business and double-check that you are taking advantage of all of the tax deductions available to you.
Would you like to make sure that you are taking advantage of all of the tax deductions available to you? If so, please feel free to book a free consultation with us.
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Disclosures
None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Piece of Wealth Planning LLC does not promise or guarantee any income or particular result from your use of the information contained herein.
