25 Small Business Tax Deductions You Should Know About

Small Business Tax Deductions
9
min read
November 18, 2021

Below is a list of small business tax deductions you may be able to write off on your 2021 tax return (the one you’ll file in 2022). These deductions apply to sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.

If you’re not sure whether they apply to you, be sure to consult with your tax professional.

1. Advertising and Marketing

You can deduct the cost of advertising and marketing your products and services, including:

2. Bad Debts

If your business loans money to a customer or supplier or makes sales to customers on credit and the debt becomes uncollectible, you may be able to write off the loss as a bad debt expense.

However, you can only deduct bad debts if your business uses the accrual basis of accounting. Cash basis taxpayers cannot write off bad debt expenses.

3. Banking and Credit Card Fees

If your bank or credit card company charges a monthly or annual account maintenance fee or other fees, these are deductible costs of doing business. You can also deduct merchant and transaction fees paid to third-party payment processors like PayPal.

4. Business Meals

You can generally deduct the cost of business meals. To qualify for the deduction:

Normally, you can only deduct 50 percent of the cost of qualifying business meals. However, on 2021 and 2022 tax returns, businesses can deduct 100 percent of the cost of food and beverages purchased from a restaurant. This temporary expansion of the business meals deduction is designed to help restaurants recover from the COVID-19 pandemic.

5. Car Expenses

Whether you have a fleet of company vehicles or use your own car occasionally for business, you can deduct those costs as a business expense.

For vehicles used solely for business, all operating costs—including fuel, maintenance and repairs—are 100 percent deductible.

For vehicles used partly for personal use, you can only deduct the costs associated with business-related use.

You have two options for calculating your deduction:

Keep in mind that the IRS requires you to keep a written record of your business miles. You can do this by using an app to track your trips or keeping a logbook in your glove compartment.

6. Cleaning 

You can deduct the cost of cleaning and janitorial services at your business premises. If you have a home office, you can also deduct a percentage of your home cleaning services as part of the home office deduction (more on that below).

7. Commissions

Many small businesses pay salespeople a salary plus commissions. Those commission payments are deductible business expenses.

8. Cost of Goods Sold

Your company’s cost of goods sold consists of all the direct costs associated with producing goods and services. These costs might include:

8. Depreciation and Amortization

When you purchase furniture, equipment, computer software, and other business assets, depreciation rules require you to write off the cost of these assets over their useful life rather than deducting the entire cost in the first year.

Amortization is similar to depreciation, except it’s used to write off the cost of intangible assets, such as patents, trademarks, and intellectual property.

IRS Publication 946 has detailed instructions, worksheets, and depreciation tables to help you calculate depreciation and amortization on business property. However, calculating tax depreciation is complicated. For that reason, it’s usually best to get help from a tax professional.

9. Dues and Subscriptions

The membership dues you pay to networking organizations, such as a trade organization or your local chamber of commerce, are deductible business expenses. However, you can’t deduct dues to any organization whose main purpose is entertainment, such as country clubs or athletic clubs.

You can deduct the cost of subscriptions to business-related magazines and journals.

10. Education and Training

You can deduct continuing education, training, and professional development expenses for yourself or your employees. To qualify for the deduction, the education expenses have to maintain or improve skills for your business.

11. Employee Benefits

The cost of providing employee benefits is deductible, including employer-sponsored health insurance and retirement plans.

Some employee benefits are considered taxable compensation to employees, and some are tax-free fringe benefits. Check out our guide to Taxable vs. Nontaxable Fringe Benefits to learn more.

12. Gifts

Many small business owners like to show their appreciation to clients, customers, vendors and colleagues with gifts. The IRS limits your expense deduction to no more than $25 per person per year for business gifts. Incidental expenses, such as engraving, gift wrapping, and shipping, are not included in that $25 limit. 

13. Home Office Expenses

If you have a home office that you use for business, you may be able to deduct a percentage of your housing expenses.

To qualify for the home office deduction, your home office must be your principal place of business, meaning it’s where you spend most of your work hours and conduct important business activities. The workspace also has to be used regularly and exclusively for business—working at your dining room table doesn’t count.

If the business use of your home qualifies for the deduction, there are two ways to calculate it:

IRS Publication 587 has more information on claiming the home office deduction.

14. Insurance

You can deduct the insurance premiums you pay for all kinds of business coverage, such as:

15. Interest

The interest you pay on business loans and lines of credit is a deductible expense as long as the debt has a legitimate business purpose.

16. Legal and Professional Fees

You can deduct the fees you pay to attorneys, accountants, and other professionals. However, if their fee includes both personal and business-related services, you can only deduct the portion related to your business.

17. Office Expenses

Any costs related to running and maintaining your office are deductible. This can include internet hosting and website maintenance fees, accounting software subscriptions, and office supplies.

18. Outside Contractors

Many small businesses hire independent contractors to help with business tasks. For example, you might hire a virtual assistant to manage your email and book appointments or freelancers to create content for your blog and social media channels. Their fees are fully tax-deductible. 

19. Rent

If you rent a designated office space, warehouse, or retail space for your business, you can deduct rental payments on your tax return.

You can also deduct the cost of renting equipment used in your business.

20. Repairs and Maintenance

You can generally deduct the cost of repairs and maintenance to your premises, equipment, and other property. But what can you write off and what has to be capitalized and depreciated? The IRS has rules to help you decide.

Repairs and maintenance costs are recurring expenses used to keep your property in good working order. This includes inspections, cleaning, testing, and replacing worn or damaged parts.

The IRS also provides a dollar threshold to help you determine whether a repair is a deductible expense or a property improvement. For most small businesses, that threshold is $2,500 per invoice or for each item listed on a single invoice.

For example, if you pay $15,000 to replace the roof on your commercial office building, you would have to capitalize the cost of the roof and depreciate it over its useful life. Commercial real estate is depreciated over 39 years, so you would deduct roughly $385 per year until it’s fully depreciated. The new roof is a capital asset that improves the value of the building.

 On the other hand, paying $1,500 to replace a few broken shingles is deductible as repairs and maintenance expense.

21. Salaries and Wages

If you hire employees to work in your business, you can deduct salaries, wages, vacation pay, bonuses, and other compensation. You can also deduct any payroll processing fees paid to an accountant, payroll provider, or payroll software.

22. Startup Expenses

Many entrepreneurs start incurring costs before they officially launch a business. These costs might include consulting with a tax professional or attorney on the best way to structure the business, performing market research to ensure your business plan is viable, and more.

The IRS allows you to deduct $5,000 in business startup costs if your total startup costs are $50,000 or less. If you have more than $50,000 in startup costs, your deduction phases out on a dollar-for-dollar basis. 

For example, if you have $50,100 in startup costs, you can only write off $4,900 in startup costs your first year in business. That’s $5,000 less $100—the amount by which you exceeded the beginning of the phase-out. If you have $50,500 in startup costs, you can only write off $4,500 of startup expenses, and so on.

Once you reach $55,000, you can’t immediately write off startup costs at all. for 100 percent—your entire $5,000 deduction is phased out.

Any startup costs that can’t be deducted must be capitalized and amortized over 15 years.

23. Taxes and Licenses

Small businesses can write off a variety of taxes, including state income taxes, property taxes, sales taxes, payroll taxes, and excise taxes. However, federal income taxes aren’t deductible.

You can also claim the cost of business licenses and permits.

24. Business Travel

Business-related travel expenses are tax-deductible, such as airfare, hotels, car rentals, ground transportation costs, parking, and tolls.

If your trip involves a combination of business and leisure, you have to allocate the expense between business and personal days. For example, say you travel to Orlando for a three-day business trip and stay two extra days to visit Disney World. In that case, you can deduct 100 percent of your airfare costs, but only three out of five nights of your hotel stay.

25. Utilities

The electric, sewer, and water utilities paid for your dedicated business premises are tax-deductible. However, don’t deduct utilities for your home office as a business expense. These are part of the home office deduction.

Stay on Top of Your Monthly Bookkeeping

To claim these tax breaks, you need to document your business expenses. Many small business owners save receipts throughout the year and try to piece together their deductions at tax time. But missing or faded expenses can lead to a lot of missed write-offs and a higher tax bill.

For that reason, it’s a good idea to stay on top of your monthly bookkeeping with the help of a bookkeeper or DIY accounting software. That way, you track valuable business deductions every month, and tax season will be stress-free.

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