Small Business Tax Deductions: What You Need to Know

As tax season approaches, small business owners must become well-versed in the world of deductions to ensure they're not leaving money on the table. Understanding small business tax deductions can significantly impact your bottom line. At Susan S. Lewis, Ltd, an experienced Chicago CPA firm, we're here to help you navigate the intricacies of tax deductions. In this blog post, we'll shed light on what tax deductions are, and how they work, and provide you with a comprehensive list of the top small business tax deductions for 2024. Let's dive in.

What Is a Tax Deduction?

A tax deduction or a tax write-off is an expense that can be subtracted from your taxable income that ultimately reduces the amount of income subject to taxation. For small business owners, deductions are a crucial tool for lowering their tax liability and maximizing their financial resources.

How Do Business Tax Deductions Work?

Business tax deductions work by allowing you to subtract eligible business expenses from your total business income. The remaining amount, known as taxable income, is then used to calculate your tax liability. Lower taxable income results in lower taxes owed.

How Do Business Tax Deductions Work: An Example

Imagine you're a self-employed graphic designer with $50,000 in yearly income from freelance projects. When it's time to file your taxes, you'll want to understand how deductions can help lower your taxable income.

• Total Income: Start with your total income of $50,000.
• Business expenses: You've incurred various business expenses during the year, such as software subscriptions and office supplies, totaling $10,000.
• Taxable income: Subtract your eligible expenses from your total income: $50,000 - $10,000 = $40,000.
• Tax calculation: Apply your tax rate (let's say 20%) to your taxable income: 20% of $40,000 = $8,000 in taxes.

By deducting expenses, you've reduced your taxable income from $50,000 to $40,000, resulting in a lower tax bill of $8,000. In this example, your deductions saved you $2,000 ($10,000 * 20%), demonstrating how deductions can minimize your tax liability. Remember to keep accurate records and claim eligible deductions to optimize your tax situation while following tax laws.

Top Small Business Tax Deductions

There are many tax-deductible business expenses. Here are a few that you should know about.

1. Home Office Deduction

The Home Office Deduction is a valuable tax benefit for self-employed individuals and small business owners who operate their businesses from a home office. It allows you to deduct a portion of your home-related expenses, thereby reducing your overall tax liability. There are two primary methods for calculating this deduction: the Simplified Method and the Actual Expense Method.

• Simplified method: This approach offers a straightforward way to calculate your home office deduction. You can deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. This method is ideal for those who prefer simplicity and want to minimize record-keeping requirements. It doesn't require you to track individual expenses like utilities, mortgage interest, or property taxes.
• ‍Actual expense method: With this method, you calculate your deduction by determining the actual expenses related to your home office. This includes a portion of your mortgage interest or rent, property taxes, utilities, insurance, and maintenance costs. While more complex and involving meticulous record-keeping, the Actual Expense Method can result in a larger deduction if you have significant home-related expenses.

2. Business Travel Expenses

Business travel expenses can be a significant deduction for small business owners. When you or your employees hit the road for work-related purposes, expenses such as transportation, lodging, meals, and local transportation are often deductible. Whether it's attending a conference, meeting clients, or exploring new markets, these costs can add up quickly. Proper documentation is key — make sure to keep receipts and records to substantiate your claims.

3. Advertising and Promotion

Advertising and promotion expenses are essential for attracting customers and growing your business. These costs are generally tax-deductible, helping you market your products or services effectively while reducing your tax liability. Deductible expenses can include:

• Costs for online advertising campaigns.
• Expenses related to print ads and promotional materials.
• Fees for website development and maintenance.
• Sponsorship and marketing event expenses.
• Social media advertising and management costs.

Investing in advertising and promotion boosts your business and offers tax benefits that can support your growth and profitability.

4. Business Insurance

Business insurance is a critical expense that offers financial protection and peace of mind for small business owners. It includes various types of coverage, each with its deductible expenses:

• General liability insurance: Deduct the premiums to protect against claims of injury, property damage, or lawsuits.
• Property insurance: Expenses related to insuring your business property, including buildings, equipment, and inventory, are deductible.
• Professional liability insurance: Premiums for safeguarding against professional errors and negligence claims can be deducted.
• Workers' compensation insurance: Deduct the costs of providing coverage for employees injured on the job, helping ensure their well-being and compliance with legal requirements.

Investing in the right insurance coverage isn't only essential for your business's security but can also yield valuable tax deductions.

5. Business Interest and Bank Fees

Businesses often incur interest expenses on loans or credit lines, and they can deduct the interest paid on these financial instruments. Additionally, bank fees related to business accounts, like maintenance fees or transaction charges, are also tax-deductible. These deductions help reduce taxable income, freeing up vital resources for your business. Some common examples include:

• Interest on business loans.
• Credit card interest for business expenses.
• Bank account maintenance fees.
• Wire transfer fees.
• Overdraft charges.

6. Vehicle Use

For many small business owners, vehicles are essential for daily operations. You can claim deductions for various vehicle-related expenses, including:

• Gasoline and fuel costs.
• Vehicle maintenance and repairs.
• Insurance premiums.
• Depreciation on the vehicle's value.
• Interest on a business vehicle loan.
• Parking and toll fees.
• Lease or rental costs.

You must maintain accurate records and differentiate between personal and business use to claim these deductions properly.

7. Office Supplies and Expenses

Office supplies and related expenses are essential for small businesses and often qualify for tax deductions. These expenses encompass everything from paper and pens to computer equipment and furniture. Notable deductible office supply expenses include:

• Stationery: Pens, paper, notebooks, and envelopes.
• Technology: Computers, printers, and software purchases.
• Furniture: Desks, chairs, and file cabinets.
• Business equipment: Copiers, scanners, and fax machines.
• Office space costs: Rent or depreciation of the space used for your business.

8. Utilities

Utilities are essential for operating a small business, and the good news is that many of these expenses are tax-deductible. These include:

• Electricity and gas: Deduct the costs of keeping your workspace powered and heated.
• Water: Expenses related to water usage in your business premises.
• Internet and phone services: Bills for internet and phone services necessary for your operations.
• Trash removal: Costs associated with waste removal services for your business.

9. Salaries and Wages

Salaries and wages paid to employees are among the most significant tax deductions for small businesses. These expenses directly contribute to your company's operations and growth. Deductible payroll costs encompass not only regular salaries but also bonuses, commissions, and even fringe benefits. Here are some examples of payroll-related deductions:

• Employee salaries and hourly wages.
• Overtime pay.
• Bonuses and incentives.
• Commissions.
• Employer-paid benefits like health insurance and retirement plan contributions.
• Payroll taxes, including Social Security and Medicare contributions.

Properly accounting for these expenses is key to ensuring accurate tax reporting and maximizing your deductions while staying compliant with tax laws.

10. Client and Employee Entertainment

Client and employee entertainment expenses can be deductible if they're directly related to your business and necessary for generating income or maintaining employee morale. These expenses can include hosting client meetings, team-building events, or celebrations. Examples of deductible expenses in this category include:

• Client dinners or lunches.
• Employee recognition events.
• Entertainment at company meetings.
• Sporting event tickets for clients or employees.

While these expenses can be deductible, it's important to adhere to specific IRS guidelines and document the business purpose of each entertainment expense to claim the deduction properly.

11. Contract Labor

Do you hire contractors? Contract labor expenses are a significant deduction for many small businesses that hire independent contractors or freelancers to perform specific tasks. These costs can include:

• Payments to freelance designers, writers, or consultants.
• Fees for temporary or seasonal employees.
• Outsourced services like web development or marketing campaigns.
• Costs associated with subcontractors on larger projects.

By deducting contract labor expenses, small businesses can leverage specialized skills without the long-term commitment of hiring full-time employees, while also reducing their taxable income. Proper documentation of contracts and payments can help you substantiate these deductions.

12. Depreciation

Depreciation is a crucial small business tax deduction that accounts for the wear and tear of assets over time. It allows you to deduct the cost of business assets like equipment, machinery, or vehicles gradually. Instead of expensing the entire cost in one year, you spread it over the asset's useful life. Examples of depreciable assets include:

• Office furniture and equipment.
• Computers and servers.
• Commercial vehicles.
• Machinery and tools.

While immediate expensing is appealing due to its rapid tax benefits, the IRS offers various methods to deduct the full cost in a single year:

• De Minimis Safe Harbor Election: Small businesses can choose to expense assets valued at less than $2,500 each in the year of purchase. More details can be found in the IRS FAQ on the de minimis safe harbor election.
• Section 179 Deduction: This deduction permits business owners to deduct up to $1,080,000 for property placed in service during the tax year, encompassing both new and used business assets and "off-the-shelf" software. Note that the Section 179 deduction is limited to your business's taxable income, but any unused portion can be carried forward for the following year's return.

13. Education Expenses

Investing in education and professional development is an essential tool for staying competitive in today's business landscape and offers valuable tax deductions for small businesses. Some deductible education-related expenses include:

• Workshops and seminars: Costs associated with attending industry-specific workshops, seminars, or conferences can often be deducted.
• Online courses: Expenses for online courses or educational materials that enhance your skills or directly relate to your business are eligible for deduction.
• Certification costs: Fees for obtaining professional certifications that improve your business offerings are deductible.
• Employee training: Costs incurred for training your employees can also be deducted.

Small businesses can leverage these education-related deductions and simultaneously invest in growth and reduce their tax liability. However, it's make sure that the education expenses you claim are directly related to your business and meet any specific IRS guidelines.

14. Professional Fees

Small businesses often rely on various professional services to thrive, and the good news is that legal and professional fees paid for these services are typically tax-deductible. These expenses can include:

• Legal fees for business-related advice or contracts.
• Accounting and bookkeeping fees to keep your financials in order.
• Consultation fees for business advisors or industry experts.
• Marketing and advertising agency fees to promote your brand.
• Fees paid to professionals such as architects, engineers, or consultants directly tied to your business operations.

Deducting these professional service fees helps reduce your taxable income and supports your business's growth and compliance efforts.

15. Inventory

Inventory is a significant deductible expense for businesses that sell physical products. It includes the cost of purchasing, storing, and managing the goods you intend to sell. This tax deduction is important for many retailers and wholesalers, helping to offset their taxable income. Here are some examples of deductible inventory-related expenses:

• Cost of goods sold (COGS): The cost of acquiring or producing the products you sell.
• Warehousing expenses: Rent, utilities, and insurance for storage facilities.
• Inventory management software: Expenses for software to track and manage inventory efficiently.
• Shipping and handling costs: Costs associated with getting inventory to your location.
• Inventory shrinkage: Losses due to theft, damage, or spoilage.

16. Business Property Rent

Renting a commercial space is a common necessity for small businesses. Fortunately, the rent you pay for your business property can often be deducted from your taxable income, reducing your overall tax liability. This deduction covers a wide range of expenses related to leasing a workspace, including:

• Monthly rent payments.
• Leasehold improvements and renovations.
• Maintenance and repairs.
• Property insurance.
• Property taxes.

Whether you lease an office, storefront, or warehouse, these deductions help you manage your operational costs and invest more in your business's growth.

17. Software Subscriptions

Software subscriptions are essential tools for many small businesses, and they come with a silver lining— tax deductions. These expenses can significantly reduce your taxable income. Some common software subscription deductions include:

• Accounting software like QuickBooks.
• Customer relationship management (CRM) tools.
• Project management software.
• Graphic design and editing software.
• Cloud-based storage solutions.
• Marketing automation platforms.

18. Bad Debt

Bad debt deduction allows small businesses to recover losses incurred when clients or customers fail to pay their bills. While providing goods or services on credit is common, unpaid invoices can impact your bottom line. The bad debt deduction allows you to offset some of these losses against your taxable income. Examples of bad debt expenses include:

• Unpaid invoices from clients or customers.
• Loans made to clients or suppliers that are unlikely to be repaid.
• Credit is extended for goods or services that were not received or used by the client due to insolvency or non-payment.

19. Charitable Contributions

It pays off to give back. Small businesses that give back to their communities can often deduct charitable contributions from their taxable income. This deduction extends beyond monetary donations and includes in-kind contributions and volunteer work. Examples of deductible charitable expenses include:

• Cash donations to qualified charitable organizations.
• Donations of goods or inventory to nonprofits.
• Sponsorship of charitable events or fundraisers.
• Expenses related to volunteering for a charitable cause, such as mileage or supplies used while volunteering.

By supporting charitable causes, small businesses make a positive impact and potentially reduce their tax burden through these deductions.

20. Business Meals

Business meals are a common tax deduction for small business owners, allowing you to offset the costs of wining and dining clients, partners, or employees. Deductible expenses may include:

• Client lunches or dinners: When discussing business-related matters.
• Employee meals: During meetings, training sessions, or overtime work.
• Office snacks and coffee: Supplies for your team and clients.
• Team-building events: Such as holiday parties or retreats.
• Networking events: Expenses incurred while attending industry-related gatherings.

Be sure to keep meticulous records, noting the date, attendees, and business purpose to substantiate these deductions during tax season.

21. Taxes

Taxes are a significant financial burden for businesses, but they also offer opportunities for deductions that can help reduce your overall tax liability. Here are some key tax-related deductions for small businesses:

• Income taxes: Depending on your business structure, you can often deduct federal, state, and local income taxes.
• Employment taxes: Deduct employer-side payroll taxes, including Social Security and Medicare taxes.
• Property taxes: Deduct property taxes paid on business real estate, if applicable.
• Sales and use taxes: If your business collects and remits sales tax, these expenses can be deductible.

Navigating tax deductions for these expenses and staying compliant with tax laws is crucial for optimizing your small business's financial health.

How to Write Off Business Expenses

Writing off business expenses involves a systematic approach to tracking your expenses throughout the year and understanding what the IRS qualifies as deductible business expenses. Here's a step-by-step guide to help small business owners effectively write off their business expenses:

• Understand eligible expenses: Before you can write anything off, you need to know what qualifies. The IRS typically allows you to deduct expenses that are both "ordinary and necessary" for your business operations. This includes but is not limited to office supplies, travel expenses, rent, utilities, and salaries.
• Keep impeccable records: Keep and maintain detailed records of all your business expenses such as receipts, bills, invoices, statements, and mileage logs for vehicle use. Modern bookkeeping software can help categorize and track these expenses throughout the year.
• Separate personal and business expenses: Always keep personal and business finances separate. This simplifies the process of determining which expenses are for business purposes and ensures you don't accidentally claim personal expenses as business ones.
• Choose the right deduction method: For some expenses, such as home office or vehicle use, you may have the choice between the standard deduction and the actual expense method. Calculate both to determine which method saves you more money.
• Depreciate large purchases: For expensive assets like vehicles, machinery, or computers, consider using depreciation to spread the tax deductions over several years, which can smooth out your taxable income and tax bills.
• Use the right forms: When filing your tax return, use Schedule C (Form 1040) to report your business income and expenses if you’re a sole proprietor. Partnerships and corporations have different forms, such as Form 1065 for partnerships and Form 1120 for corporations.
• Consult with a tax professional: Tax laws can be complex and they change frequently. Consulting with a seasoned CPA like Susan S. Lewis, Ltd. can provide you with up-to-date advice tailored to your business situation, helping you to maximize your deductions and stay compliant with tax regulations.
• Stay current with IRS rules and limits: Some deductions have thresholds or caps. For instance, there's a limit on the amount you can deduct for business meals (usually 50% of the cost). The IRS also adjusts mileage rates annually, so it's important to use the current rate for vehicle expenses.
• File accurately and on time: Ensure that your tax return accurately reflects all the deductions you’re claiming and that it's filed before the deadline. Mistakes or late filings can lead to penalties or even an audit.

By following these steps and understanding the nuances of business expenses, small business owners can leverage tax deductions to reduce their tax liability and boost their business's bottom line. Remember, when in doubt, it’s better to ask a professional rather than risk making an error on your tax return.

FAQs About Tax Deductions

Conclusion

Whether you operate as an LLC, sole proprietorship, or any other business structure, navigating the intricacies of tax write-offs and deductions can be a huge undertaking. Fortunately, seeking the expertise of a qualified tax professional can make all the difference in ensuring you maximize every available benefit.

At Lewis.CPA, we understand the nuances of tax planning and deduction strategies for businesses of all sizes and structures. Our experienced team is here to help you identify and claim the deductions that are most advantageous for your specific situation. With our guidance, you can minimize your tax liability while staying compliant with tax laws.

Don't leave potential tax savings on the table. Contact us today for additional information and discover how we can tailor our services to meet your business's unique tax needs.