Every dollar counts when you’re a one-person show or running with a small group of employees. Small businesses are the lifeblood of this economy, and the IRS and State tax codes reflect that. Let’s discuss how to save money on small business taxes and some tax breaks to make that happen.
Before we begin: It’s important to remember this is not tax advice. If you’re unsure of anything or need help with your tax situation, speak with a professional. This is merely for reference and educational purposes.
Do you need to be a small business to take advantage of what you see here? Of course not. Most of what’s on this list can apply to any size of business. You don’t necessarily need to be a small operation to benefit.
In this post, we’ll cover the following:
What Are Tax Breaks?
The local, state, and federal government tax codes offer dozens, if not more, ways to lessen your business’ tax burden in certain circumstances. The goal of these tax credits and deductions is to make operating a business more appealing and fruitful. These tax deductions often lead to more money in the business coffers or your pocket as the business owner, which is great. I always recommend that folks take as many deductions and credits as possible but never fake it. That’ll come back to haunt you, for sure.
List of Tax Breaks For Small Businesses
Let’s break down some of the most popular and sometimes most overlooked tax breaks small businesses can take. Keep in mind these may not all apply to your situation, and always talk to a tax pro if you’re unsure.
1. Meals/Lunch Meetings & Employee Entertainment
This is one I see asked about a lot, so I threw it up front. Meals you have that are related to the business being conducted, i.e., meeting with a client, travel for business reasons, or as part of your business function are generally deductible up to 50%. This typically goes for company parties and employee entertainment, too.
2. Personal Cell Phone for Business calls
It’s not always reasonable to carry two phones around all the time. If you use your personal cell phone to make business calls, you could potentially be able to deduct a portion of that phone’s operating cost.
These costs would include the monthly service plan, associated fees, and the phone’s cost. The trick here is to keep it reasonable. If you spend 40 hours per week on the phone and 10 of those hours are for business, it’s not unreasonable to deduct 25%.
3. Deducting Personal Health Care Premiums
If you don’t or can’t get insurance through your business, you may be able to deduct your healthcare premiums from your tax return. This doesn’t always apply to everyone, so speak with your attorney or CPA.
4. Lessen Taxable Income Where Possible
The general idea is that as long as you’re able, take your business profits and reinvest them into the business. Spending that money to grow the business could yield a lower tax burden using a lot of the ideas mentioned in this article.
5. Travel Costs
Needing to meet with a client? Any travel expenses you incur during the regular course of doing business, these expenses can generally be written off. For example, a flight to another city, a rental car, and nights at a hotel could all be viable expenses to write off if that trip and those resources were paid for to conduct business. If you rented the car and only ever went on joy rides, it likely wouldn’t count.
6. Qualified Business Income Deduction
Thanks to the Tax Cuts and Jobs Act, a standard income deduction is in place for most businesses that make under a specific dollar amount. Most Sole Proprietors, LLCs, S-Corps, and Partnerships, expect a 20% income deduction right off the top before anything else. For small business owners where taxes are pass-through and personal taxable income is $157,000 or more ($315,000 filing jointly), the credit starts to phase out.
7. Repairs to Your Space
It costs money to keep a business space running and serving customers. Leaky pipe? A new hole in the roof? Repairs to a business space can generally be deducted.
Personal-owned vehicles (including leased) used for business purposes can be deducted from your business taxes in several ways. The most common is to take a mileage record of all the business activity. Pair that with the standard IRS mileage rate of $0.58 per mile.
For example: if you use your vehicle for business and drove 300 miles for business purposes, that’s $174 to deduct.
The alternative is to record actual documented expenses such as gas, repairs, tires, insurance, registration, etc., and calculate the percentage of time the vehicle was used for business purposes. If all the explicit vehicle costs were $930 for a month and the vehicle was used 35% of the time for business, that’s $325.50 to deduct.
9. Home Office
This is a deduction often overlooked by those just starting or operating their businesses from home. The IRS allows business owners to deduct the cost of their home office space, up to a certain amount, provided it’s used for business.
The math can be broken down into two forms: the simple calculation, which is $5 per square foot, up to a maximum of 300 feet, or the more complex calculation of the ratio of your business space in your home compared to the entire home and applying that percentage to all of your home expenses such as the mortgage, mortgage interest, utilities, home repairs, etc.
For most, it’s best to take the simple calculation. The complex option might be more beneficial, but that adds to the need for more detailed record-keeping, especially for one-time costs.
10. Renovations for Home Office
This one falls similarly along the line of deductions for home offices. If you have a home office space, but it needs some work for you to operate your business more effectively, those renovations might be tax-deductible. For example, if you’ve been in your home office for a while and it’s time for a new carpet, it’s not unreasonable to file that as a deductible expense.
That cost is deductible if you’re renting or leasing office space in a building or an entirely free-standing structure. Plain and simple.
12. Mortgage Interest
As with most tax situations, the interest on a mortgage is tax-deductible. However, there might be a case where this doesn’t apply to you, so make sure to consult your professionals.
13. Moving Expenses
If the business relocated for one reason or another, the costs to relocate the business could be deductible. It’s essential to ensure the relocation was necessary. Growth? The existing building is being knocked down, so you need to find a new spot? Valid reasons. Because you felt like it? Mmm, maybe not.
14. Advertising Expenses
Some businesses consider advertising expenses like operating costs, and for a good reason. Without foot or virtual traffic, there is no business. Advertising your business and its goods and services is essentially a deductible expense.
15. Office Supplies
If there were ever the term “Yet Another Business Expense,” office supplies would fit squarely within it. The key to this category is to be reasonable. Printer paper, pens (maybe even nicer ones), and the like are always acceptable, but it’s essential to ensure the supplies are going to be used by the business. In other words, don’t buy 3,000 reams of paper at the end of the year if you only print a handful of documents a month.
Electricity, gas, water, sewer, trash, landscaping, security, television, and Internet… are all excellent examples of utility or other services that would fall under a similar category. These are pretty safe to write off in most cases.
The software you use during the regular operation of your business is entirely deductible. Things like a yearly Adobe subscription are great. Video games probably aren’t unless you can prove your business operates based on the necessity of having a copy of a video game.
18. Salaries/Employment Benefits
The paychecks and benefits you issue your employees are entirely deductible and can make for a sizable taxable income if you have a staff.
Paying your employees a commission would generally fall under the same guidelines as other forms of compensation.
20. Retirement Plans
Typically filed under the “benefits” portion of compensation, retirement plans can be an excellent way to lessen your tax load and provide employees a way to contribute to their future. The tax code incentivizes employers to offer retirement plans and matching opportunities. Speak with your professionals about this one.
21. Employee Education & Child Care
Have employees with children? Offering a childcare benefit or stipend is a great way to help them out and positively affect your business’s taxable income. Keeping an employee’s mind fresh and growing within your company is a win-win, too, by offering a stipend for education (through books or courses).
22. Freelance/Contract Workers
Did you hire an ad agency to come up with new branding? Bring in an IT consultant to help redo your warehouse network and WiFi. Did you have a massive boost in customer demand, and the warehouse needed extra bodies for a few weeks? Hiring staff temporarily, for a season, or a specific purpose? The services they provide you and your company can be considered a deductible expense.
23. Work Opportunity Tax Credit
The government (both Federal and State in some cases) offers special incentives to businesses that hire military veterans and those who have been unemployed for more than a certain period. The simplest example is the ability to deduct 40% of the first $6,000 in wages paid to the relevant employees.
Some states have specific programs, too, so it’s a good idea to check with them and your professionals about your options.
In what initially seems like a bit of irony, businesses that have paid up to $10,000 in taxes (local income, sales, real estate, personal property, self-employment, franchise, excise, etc.) may be able to deduct those taxes from their taxable income.
Sound recursive? It’s a bit of an odd area, so be sure to consult your professionals on how to best handle this one.
If your business has insurance policies on its property, inventory, etc., those premiums could be deductible from taxable business income.
26. Charitable Donations
The IRS wants everyone to donate to charity, so just like personal income taxes, business income taxes can be affected by charitable donations up to a certain amount. One big caveat here: this deduction is only allowed by C Corps. If you’re an LLC or Sole Proprietor, your business income is pass-through, so personal charitable donation rules apply on your Form 1040.
27. Disaster and Theft Losses
It’s never a good thing to see happen, but unrecovered losses from disaster and theft may be tax-deductible (See Publication 547 on how to figure that out). The general idea is any loss reimbursed by insurance or salvage value doesn’t count. This Investopedia article goes into great detail about what counts, what doesn’t, and why.
28. Legal Fees
Any work your company has done by a lawyer or legal team would likely be deductible, as this often falls under contracted/freelance work we’ve covered above.
29. Licenses, Trademarks, Etc.
When building a new brand, its legal standing is one of the most critical factors in long-term success. The money spent on filing for a patent, trademark, etc., can all generally be deducted from your business’s taxable income.
30. Interest on debt
The kitchen needed a new stove and freezer, which cost you $56,000. Instead of forking over the cash all at once, you opted to put it on a credit card. You’ll be paying it off over months. The good news is the interest is likely deductible. In many cases, a financial institution’s lines of credit and other debt products also count.
31. New Capital Equipment
Ex: Buying additional equipment for a restaurant to cook things. Deduct it all at once or over seven years.
You’re opening up a new location and need to spend a lot of money on new equipment. The cost of this equipment can be deducted, but how you do, it is up to you. The expense can be deducted at once, or you can split it up over a max 7-year period. Depending on your deductions for the year, you may have to carry some of the deductions over, so keep that in mind. (See #37)
32. Start-Up Costs
Starting a new business? Up to $5,000 in expenses related to starting the business (website, software, computer, legal fees for the incorporation, etc.) can all be counted as deductible expenses.
33. Equipment Rentals
Need equipment, but only temporarily? Be it a vehicle or a Skyjack, it generally counts if it’s required to operate your business. A good example is renting a forklift because the one in your warehouse is out of commission for some time, or you only need one day per month.
34. Inventory for Service-Based Business
This is a more nuanced category compared to a lot of others. Still, the idea is that if you’re operating using cash-based accounting and have to buy supplies to operate, you could very well be able to deduct them. For example, if your business sells cakes, the flour might be deductible because while it goes into the thing you sell, you don’t sell the flour itself.
35. Bad Debt
If you’re loaning money to people, you might be able to deduct the bad debt from your taxable income if that debt was never paid.
36. Sold, Unpaid Goods
Businesses that sell large volumes, like distributors, may sell those goods to other businesses on credit or through NET terms. If those bills are never paid off, the amount may be deductible from your business taxes.
37. Previous-Year Deductions
There comes the point where a business can’t deduct any more within a specific category. The IRS allows businesses to carry over deductions to future years. So that $1,000,000 equipment purchase can carry over seven years and make future tax bills quite appealing.
If it’s not apparent yet, the trend is that most of these are simply business costs. Not all of these will apply to your business or your tax structure. Be sure to speak with a professional before diving headfirst into this. At the end of the day, if you’re a U.S. business, chances are there’s a deduction you’re not taking for just about anything, so long as it’s a fixed cost, human cost, or existence cost. But, after all that, what’s left?
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