Top 25 Small Business Tax Deductions

Top 25 Small Business Tax Deductions

Updated for 2019 – 2020

Claiming legitimate deductions is an important income tax strategy for small businesses. By legally writing off certain expenses of operating a company, your business may owe less in taxes — sometimes much less. That’s why the list below of the most common small business tax deductions is so important.

Use this list of small business tax deductions to prepare your tax return. Also, use this list for future planning. For example, a savvy small business owner will run projections about possible tax write-offs to determine how much to pay in estimated quarterly taxes. Projections also can help you decide whether to push certain expenses into a future year or expend them in the current year to offset high income you anticipate.

Our top 25 list is based on IRS data showing the write-offs commonly taken on sole proprietorship returns using a Schedule C. Other types of entities — C corporations, S corporations, partnerships, and limited liability companies (LLC) — also claim similar write-offs although some entities have slightly different rules. The list below is applicable to most small businesses regardless of business structure.

Top Small Business Tax Deductions

To be deductible, the IRS says a business expense must be ordinary (common in your industry or trade, such as software) and necessary (needed to run the business, such as supplies). Expenses must be for business, not personal purposes. The expenses below meet these requirements. Here are the top 25 small business tax deductions:

1. Car and Truck Expenses

Most businesses use a vehicle, such as a car, light truck, or van. Subtract the cost of operating the vehicle for business only if you have records to prove business usage.

You can eliminate the need to keep records of specific costs (e.g., gasoline, oil changes) if you rely on the standard mileage rate set by the IRS each year, instead of deducting your actual outlays. Whether you deduct actual costs or use the standard mileage rate per mile driven, you still need to keep a record of how many miles and the purpose. See the 2020 IRS standard mileage rate.

2. Salaries and Wages

Payments to employees, including salaries, wages, bonuses, commissions, and taxable fringe benefits, are deductible business expenses for the business.

Payments to sole proprietors, partners, and LLC members are not wages (i.e., they are not deductible business expenses) because these owners aren’t employees. However, in a C corporation or S corporation, the owner may be designated as an employee and receive a salary, if the owner performs more than minor services.

3. Contract Labor

Many small business owners use freelancers or independent contractors to meet their labor needs. The cost of such contract labor is deductible. Be sure to issue Form 1099-MISC to any such contractor receiving $600 or more from you in the year. If payment is made to the contractor via credit card or PayPal, it’s up to the processor to issue the independent contractors a Form 1099-K, but you may want to send your 1099-MISC for personal protection.

Note that for services performed by your independent contractors in 2020 and later, Form 1099-NEC replaces the 1099-MISC.

4. Supplies

The cost of items used in a small business (e.g., cleaning supplies for a cleaning service), as well as postage, are fully deductible business expenses. Also, if you opt to use a de minimis safe harbor allowing you to deduct the cost of tangible property (e.g., tablets, vacuum cleaners) rather than depreciating, the items are treated as non-incidental materials and supplies. They are deductible business expenses when purchased or furnished to customers, whichever is later.

5. Depreciation 

In some cases you can write off the full cost of certain property you purchase for business use, in the tax year in which you purchased it. This includes the Section 179 deduction, which allows you to deduct the full cost of equipment purchases up to a certain dollar limit ($1,020,000 in 2019; $1,040,000 in 2020). Certain other limits also apply to Section 179 deductions.

In addition, there’s what is called a bonus depreciation allowance, which is another type of write-off in the year costs are incurred. The bonus depreciation limit is 100% for business property acquired and placed in service in 2019 (as well as in 2020).

Another way to claim a write off for business property is through depreciation. Depreciation means deducting on your taxes a certain allowance each year that spreads out the cost for tax write-off purposes. Depreciation is calculated based on a method approved by the IRS for allocating a certain amount of the cost each year over time, such as 10 years.

Don’t overlook remaining depreciation allowances leftover from prior years. Check old returns for depreciation opportunities.

6. Rent on Business Property

Fully deduct the costs of renting space for your business. Rent can include an office, boutique, storefront, factory, or another type of facility.

7. Utilities 

Fully deduct electricity for your facility. Other utility expenses include your mobile phone charges.

One limitation: you cannot claim a deduction for the cost of the first landline to your home if you claim a home office deduction and have a landline. Claim a second line as a deductible utility cost.

8. Other Taxes 

Certain taxes are deductible on federal income taxes. Generally you can deduct real estate taxes, personal property taxes. Licenses and regulatory fees also are considered taxes by IRS rules for this purpose.

Deductible taxes also consist of employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes. However, self-employed business owners cannot claim a business deduction for half of their self employment tax. Instead, owners should record it as an adjustment to gross income on their personal 1040 return, and use Schedule SE.

Owners of pass-through entities cannot treat state and local income taxes as a business write-off. These are personal tax deductibles for taxes. State and local income taxes are deductible only on Schedule A of Form 1040 or 1040-SR (and for 2018 through 2025, are subject to a $10,000 cap for all state and local taxes).

9. Insurance 

The costs of your business owner’s insurance policy, malpractice coverage, flood insurance on business premises, cyber liability coverage, and business continuation insurance are all fully deductible business expenses.

For health insurance coverage, there are two rules to note. A small business may qualify to claim a tax credit for up to 50% of the premiums paid for employees (a credit is a better tax break than a deduction). Also, the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the insurance premiums are deducted on the owner’s personal return.

10. Repairs

The cost of ordinary repairs and maintenance on business property is fully deductible. On the other hand, costs that add to the property’s value are usually capitalized and recovered through depreciation. However, various safe harbor rules allow for an immediate deduction in any event. Your tax advisor can explain the safe harbor rules.

11. Commissions and Fees

Commissions and fees you pay are fully tax-deductible. You may be required to report them on Form 1099-MISC for 2019 (Form 1099-NEC for payments in 2020) (see item #3).

However, commissions paid in connection with buying real estate are not deductible. Realty commissions are added to the basis of the property and are usually recovered through depreciation.

12. Travel 

If you or staff members conduct business travel, you’ll find the cost of transportation (e.g., airfare) and lodging fully deductible. You must substantiate a business purpose to claim any travel deduction. Don’t forget incidental travel expenses such as fees for checked baggage or oversized baggage, tips and more.

Local commuting costs, on the other hand, usually remain nondeductible. Commuting means getting to and from your place of work. Read more about small business travel tax deductions.

13. Advertising

You may fully deduct ordinary advertising expenses on your tax return, regardless of the advertising media you use. That can include everything from printing business cards to Facebook ad campaigns and anything in between. Expenses related to marketing often fall under the category of “advertising expense.”

14. Home Office 

It is possible to deduct a portion of expenses for a home office as a business expense. In order to claim this deduction, business owners must use the home regularly and exclusively as your principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business.

You can deduct direct costs such as painting a home office. You can also deduct indirect costs, in the form of a percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use of the residence.

You may worry that claiming a home office deduction sends a red flag to auditors. Don’t be afraid to take advantage of this deduction if you qualify. Today more than half of all businesses in the U.S. report as home-based. So the IRS won’t view a home office deduction with the same suspicion as in the past. Read more about the home office deduction.

15. Legal and Accounting Fees 

You can fully deduct accounting fees. You can also deduct fees you paid for tax return preparation during the calendar year, and not the tax year to which the fees relate. For example, you own an S corporation that paid fees in March 2018 for the preparation of its 2017 tax return. The fees are deductible on the S-corporation’s 2018 return.

The deductibility of legal fees depends on what you use them for. You may fully deduct the costs of a lawyer reviewing a business contract or lease. However, you cannot deduct costs for handling the closing on a property purchase, and then add it to the basis of the property.

16. Meals

Deduct these business expenses only up to 50% (although fully deductible meals do exist). This means in effect that you pay for half of a business lunch, and Uncle Sam pays for the other. You can only claim the deduction if you substantiate the expenses are exclusively for business purposes.

17. Rent on Machinery and Equipment 

Fees paid to lease or rent items used in your small business are fully deductible.

18. Interest on Business Debt

Most business taxpayers can deduct interest paid on business loans. For example, interest on a line of credit used in a construction business is deductible. However, companies with average annual gross receipts in the three prior years of more than $26 million in 2019 (or 2020) must limit the percentage of interest that is deductible.

Interest on loans by owners to buy their businesses are treated differently. Be sure to distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction. For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. Assuming you use the assets in the business, then your interest counts as deductible business interest.

If some assets include investments, then you may consider a portion of the interest as investment interest. You can count this as a personal deduction limited to the extent of net investment income. If some assets relate to a passive activity, such as rental realty, the allocable interest counts as passive activity interest subject to the passive activity loss limitation.

19. Employee Benefit Programs and Qualified Retirement Plans 

You may deduct the cost of employee benefit programs, such as education assistance and dependent care assistance, as well as contributions to employees’ qualified retirement plan accounts.

For self-employed individuals, contributions to your own qualified retirement plan accounts are personal deductions claimed on Form 1040 or 1040-SR.

20. Mortgage Interest 

Deduct mortgage interest if your business owns realty. The law caps interest on a personal residence. But no cap exists on the size of business loans on which interest can be claimed.

21. Office Expenses

Do you use flowers, fish tanks, magazine subscriptions and other items to spruce up your office? Office expenses are tax deductible.

22. Carryovers 

Your tax activities in prior years sometimes yield write-offs in the present. You often can use past losses and any amounts you were unable to claim fully in a prior year, to cut your tax bill this year. For example, if you previously had a bad year, you may still have a net operating loss carryover that you can use to reduce your current taxable income.

Make sure to check prior year returns. Look for any unused amounts to carry over. Examples of carryovers include net operating losses, capital losses, charitable contributions, investment interest, and home office deductions that were previously subject to a taxable income limitation.

23. Bad Debts 

Some businesses report on the accrual method of accounting and possess unpaid receivables or other debts. Businesses using the accrual method may take a tax deduction for any amount owed to you that’s partially or wholly worthless.

For example, if your business advanced money to an employee, customer or vendor, and you haven’t been repaid, you may be entitled to a bad debt deduction. If it is a business bad debt that becomes partially or wholly worthless, you deduct the amount as an ordinary business deduction.

24. Miscellaneous Business Expenses

Even if an expense doesn’t fit neatly into any of the categories listed above, you may still find it deductible as long as it’s “ordinary and necessary” for the business. Include items you pay out of petty cash. Examples: business and trade magazines you buy at a newsstand, coffee with a customer, or a taxi ride to a vendor. The key to deducting them is to have documentation. Suggestion: when you can’t obtain a receipt, take a photo with your smartphone (which is imprinted with the date) and maintain a log of miscellaneous expenses.

25. QBI Deduction 

While a small business owner may take a personal tax write-off on a Form 1040 or 1040-SR, you base this on income from a pass-through entity. The qualified business income (QBI) deduction lowers the effective tax rate paid on business profits on owners’ personal returns. The deduction makes up 20% of QBI. But you may find limits to restrict or bar eligibility to claim any write-off. Read more: Qualified Income Deduction.

What Else Can I Deduct as a Business Expense?

Below are minor tax deductions that are often overlooked or that apply in limited circumstances.

Startup Costs – You can deduct up to $5,000 in startup costs and $5,000 in organizational costs (such as incorporating) incurred in your first year in business — but only if costs, in either case, did not exceed $50,000. Some startup entrepreneurs may elect to treat costs as capital expenditures (added to your investment in the business). But most elect to deduct these costs, up to $5,000. Any remaining amount is then amortized (deducted ratably) over a 15 year period.

Bank Fees – Fees you pay to maintain your business checking account, access the ATM, obtain new checks, and other banking fees are fully deductible. Review your bank statements to identify fees.

Membership Dues – You can deduct membership dues from professional and business-related organizations. Organizations include chambers of commerce, civic organizations, and trade associations.

Franchise and Trademark – If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense. Certain stipulations apply.

Cancellations – Things can go wrong, forcing cancellations of plans. For example, you may have booked a business trip and had to reschedule. The airline rescheduling fee as well as the hotel deposit you lost are deductible.

Credit card Convenience Fees – A small business that uses credit cards can deduct convenience fees charged by the card companies. A convenience fee is any non-standard use of a credit card for which the merchant charges a special fee. This might be a fee for accepting phone orders.

Education Expenses – Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. You can also deduct the cost of your own education related to your trade or business.

Moving expenses – You may be able to deduct moving expenses if you are a sole proprietor or self-employed and had to move more than 50 miles for business.

Internet – Generally, you can deduct internet-related expenses, such as domain registration fees and webmaster consulting costs for your company website.

Make sure to also check out NON-deductible expenses.

Can I Take the Standard Deduction and Still Deduct Business Expenses?

Yes, small business owners can claim the standard deduction on their personal 1040 returns, and also write off business expenses on Schedule C.

Now that the standard deduction amounts are higher, fewer taxpayers are itemizing deductions. Taking the standard deduction on line 9 of your 1040 return is becoming more popular.

However, the standard deduction is something completely separate from business expenses which are itemized separately on Schedule C.

Consult an Advisor

The information above gives you a general answer to the question “what can I deduct as a business expense”. However, tax deductions can be confusing and you will want to avoid the biggest tax mistakes. It is best practice to consult a CPA or other qualified tax preparer for what applies when completing your tax return.

Information sources:

IRS. “Sole Proprietorship Returns”

IRS. “Publication 535 Business Expenses.”

IRS. “Publication 946 Depreciate Property.”

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Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.

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