TurboTax will show you the money-saving tax deductions you can take as a small business owner.
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Sure, you pay tax on your business profits. But there’s good news, too. You can reduce your taxable income significantly by taking all the deductions you’re entitled to as business expenses.
To determine whether you can deduct an expense, ask yourself: Is this expense both ordinary and necessary to the business? The IRS requires both elements.
Read below for information about some of the most common small business deductions.
As a small business owner, you can deduct automobile expenses for visits to clients, vendors, or travel to business meetings away from your regular workplace. If you operate your business out of your home, a drive from your home to a supplier and back home is a 100% deductible business expense.
When figuring auto expenses, each year you typically can choose between taking the standard mileage rate (which generally changes every six months to a year) or deducting your actual expenses for items such as gas, oil changes, tires, repairs, preventive maintenance, insurance and registration.
In choosing the method that yields the higher deduction, the number of miles you drive each year is probably the most important factor.
When deducting your automobile expenses, you need to keep a record of the use of the vehicle. Often, the best way to do this is with a written log of your trips noting the date, miles driven, and purpose of each trip. Try to keep a record of your trips as they occur, when it's easier to keep track of the details or perhaps use a phone app to track your activity.
If you're self-employed, even if you claim the standard mileage rate, you can also deduct:
How can something bad be good for you? Easy: If you loaned money to customers, suppliers or employees who never paid you back, you may be able to claim a bad-debt deduction to offset part of your loss. This type of debt must have the following characteristics:
It's also possible to claim a bad-debt deduction if someone doesn't pay you for work you performed or products you sold.
With an ordinary business expense, you typically deduct the entire cost of the purchase in the tax year of the expense. But if you purchase an asset for your business that you will use beyond the current tax year, you usually are required to spread out the deduction over the asset's expected life. This concept of spreading out a deduction over the life of an asset is called depreciation.
The asset needs to meet three requirements in order to be depreciated. It must be:
The following assets can't be depreciated:
Of course, there are always exceptions. Small businesses may be able to deduct all or most of the cost of a depreciable asset in the year it is placed in service instead of spreading the cost out over the life of the asset.
While the idea of taking a huge deduction right away may sound good to you, be careful, because there is a downside. If you sell an asset, you may have to recapture all or part of the depreciation deductions. (Recapture means reversing all or part of your earlier deductions by adding them back as income.)
Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus "expensing" of assets that are either new or used through 2022.
Compensation you pay employees is deductible, including:
You get a deduction whether you pay wages to employees, to whom you provide a W-2, or use independent contractors, to whom you issue Form 1099-NEC. You can also write off the cost of qualified benefits such as:
Other deductible fringe benefits include qualifying expenses such as:
If you use a specific area of your home regularly and exclusively for your business, you may be able to claim the home office deduction. Generally, your home office must be your principal place of business or you must use it to meet clients on a regular basis.
You can work out of your home and save on taxes at the same time. Sound impossible? It’s not, but the home office deduction is a bit tricky, so you need to know all of the details. To take the home office deduction, you have to use your home office regularly and exclusively for your business. Generally, your home office must be your principal place of business, or you must use it to meet clients or customers on a regular basis.
To claim that your home office is your principal place of business, you are required to perform the most important part of your work there or use the office for administrative or management activities, and not perform these activities at any other fixed location, such as another office off-site.
Examples of administrative and management activities include:
For example, if your business involves repairing clients' computers in their homes, you can deduct your home office if you use it to set up appointments and bill customers, even though you don't repair the computers in your office.
You can also claim the home office deduction if you store inventory or product samples there, or if you operate a day care facility.
The size of your deduction depends on the percentage of your home that is used for business. If your total business expenses exceed gross income from business use of your home, your deduction can be limited.
The two most common methods of calculating business percentage are:
The IRS has a simplified option for claiming the deduction. This new method uses a prescribed rate multiplied by the allowable square footage used in the home.
With either method, the qualification for the home office deduction is determined each year. Your eligibility may change from one year to the next.
Because the home office deduction is a complex area that has been the subject of much controversy and many court cases, you may want to look at more detailed discussions of this deduction in IRS Publication 587: Business Use of Your Home.
You can deduct insurance expenses for your business as long as they're ordinary and necessary. Common examples include:
There are a few types of insurance costs that you may not deduct. These include:
Generally, you can deduct all of the interest you pay during the tax year on debts related to your business.
A corporation can deduct the interest it pays on loans from its shareholders. There should be a valid business purpose for such a borrowing arrangement and written documentation in place detailing the:
Since these types of arrangements may receive increased scrutiny from the IRS, you should have evidence that the transaction is a loan and not an investment.
Loans that are for both personal and business uses are only partially deductible because the personal use will limit your deduction. For example, if you take out a car loan on a vehicle that you use for both business and personal reasons, part of the loan interest won't be deductible.
Fees that you pay to professionals, such as attorneys and accountants, are deductible when they relate to your business. If you purchase depreciable business assets, the fees paid for professional services are not deducted, but are added to the tax basis (or cost) of business asset.
Example: You negotiate the purchase of a pool-cleaning route for $22,500. You pay $2,500 in professional fees for an attorney to draft a non-compete agreement with the seller and hire an accountant to perform a due-diligence review of the books. For tax purposes, your cost basis in the pool route is $25,000 ($22,500 + $2,500).
If you began the business this year, legal fees to incorporate or to organize your business as a partnership may also be deductible.
If you are a sole proprietor, you can deduct accounting and tax preparation fees on Schedule C, to the extent that they are related to your business.
If you set up and maintain a retirement plan such as a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) plan, you can deduct contributions you make for yourself and your employees.
If you don't have any full-time employees, except your spouse, you may find that an individual 401(k) plan may offer an even better deal than a SEP or SIMPLE plan.
Typically, qualified contributions for a sole-proprietor are not deductible as a business expense but are a deduction for calculating your adjusted gross income and therefore can reduce your income tax.
You can also deduct trustee fees incurred to maintain and administer the plan if contributions to the plan don't cover those fees. To learn more about different plans and how to set them up, see:
The IRS defines rent as any amount that you pay to use property you do not own. Most of us are familiar with the concept of paying rent for office space, land or equipment. The home office deduction discussed above allows for the deduction of a portion of your rent on your home, condo or apartment if you use part of it as a place of business.
If you rent property from your relatives or a related company and the IRS deems the rent to be excessive, the IRS will disallow the deduction.
Rents are usually deductible in the year they are paid.
There are many taxes that you can deduct when operating a business. For example, if your state taxes the gross income of your business, you can deduct that tax on your federal return. As an employer, you can also deduct your share of your workers' employment taxes.
Here are some other taxes you can deduct:
Fuel taxes that you pay for gasoline, diesel or other types of motor fuels are already reflected in the cost of the fuel, so you can't deduct these taxes as a separate item. Note that you may be entitled to a credit or refund for federal excise tax you paid on fuels used, for example, in a farming operation where your vehicles are used off-road.
Go out on the town with your clients, pick up the bill and get a tax deduction. What could be easier? Just make sure that the outing is business-related. In other words, any payments you deduct for travel and meals must be ordinary and necessary in your trade or business.
Travel expenses include those for ordinary and necessary travel away from home overnight for your business. You must meet two conditions to take the travel expense deduction:
If your trip meets these requirements, you can deduct a wide variety of travel-related expenses, including costs for:
Other deductible travel-related expenses include:
Meal expenses include those incurred while traveling away from home or for business-related meals with business associates at your place of business, a restaurant or other location. This deduction may also apply to meals you furnish on your premises to your employees.
Entertainment expenses fall into a broad category and include any activity generally considered to provide amusement or recreation. Some examples include hosting clients at social, athletic or sporting clubs, theaters, yacht trips, hunting or fishing, vacations and the like. Beginning with tax years after 2017, generally entertainment expenses are no longer deductible.
For more information on travel, see IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses.
So far, we've discussed the most common small business deductions. Other deductible expenses include:
Sorry, the news on write-offs isn't all good: Some business expenses are not deductible under any circumstances including:
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