Small business tax deductions can help reduce your tax liability, but do you know which expenses qualify?
We’ve gathered the top and most impactful business tax write-offs that owners can utilize.
Let’s review what is a tax write-off for small business, 27 of the best tax deductions and how to write off business expenses when it’s time to file.
What Are Small Business Tax Deductions?
A tax deduction lowers your overall tax liability by decreasing your taxable income. This is different from a tax credit, which directly reduces the taxes you owe, not your taxable income.
An expense must be categorized as both ordinary and necessary to be included in business tax write-offs. As defined by the IRS, ordinary expenses are costs that are “common and accepted” in your industry or business. A necessary expense is a cost that is considered “helpful and appropriate” for your industry or business, but it’s not essential.
Some “ordinary and necessary” business expense deductions include:
- Employee compensation
- Retirement plans
- Rental expenses
- Local, state and/or federal taxes
Small Business Tax Deductions Checklist
Here is a list of the top deductible business expenses your business can employ. Note that hundreds, if not thousands, of business tax deductions that are relevant to small business owners.
1. Qualified Business Income Deduction
Business structures with pass-through income (sole proprietors, S corporations and partnerships) may be eligible for an up-to 20% deduction on their total income, also known as Qualified Business Income (QBI), and a 20% deduction on any real estate investment trust dividends (REIT) and qualified publicly traded partnership (PTP). QBI can be filed through Worksheet 12-A.
QBI is your business’s income for the fiscal year, minus any of the following:
- Capital gains or losses
- Dividends or interest
- Annuity payments
- Foreign currency gains or losses
Owner compensation and guaranteed payments to business partners for services rendered can also be included in this list. However, such write-offs are not as straightforward. Any amount paid to business ownership must be deemed reasonable by the IRS. We recommend asking your accountant how to handle these potential business tax write-offs best.
2. Car and Truck Expenses
There are 2 ways to write off business car and truck expenses: standard mileage or actual costs.
If you choose to track your miles, the 2021 standard mileage rate is 56 cents per mile, decreasing from 57.5 cents in 2020.
Even if your actual mileage costs are less than the current rate, you can still apply the standard mileage deduction. Any mileage costs claimed must be associated with business activity; proper documentation of these costs must also be kept on hand for 7 years after you’ve filed.
For further detail on car and truck expenses and how to report them, refer to Publication 463.
There are quite a few small business tax breaks when it comes to business travel. For example, if you’re on the road for business, any travel costs incurred while going to and from your destination is eligible for business tax write-offs.
In addition to transportation, lodging, dry cleaning, phone charges or any other item purchased to conduct business are considered tax-deductible business expenses. Just as you would with any vehicle claims, be sure to keep travel expenses on file for 7 years.
For further information on which travel and non-entertainment related expenses can be deducted and how to report them, refer to Publication 463.
4. Home Office
You may be eligible for home office small business tax deductions if there is a dedicated area within your home used only for business. The area’s size dictates the overall deduction; if you use the simplified option, multiply the square footage of the home office by $5.
However, if you use the regular method for your business tax write-offs, calculate and record your actual expenses for the percentage of office space.
If you’re expensing your home office costs as itemized deductions, use Schedule C (Form 1040). You will also need to fill out Form 8829 if you’re using the simplified method, which according to Revenue Procedure 2013-13 from the IRS, is “an easier way to determine the number of expenses you can deduct for a qualified business use of a home.”
5. Office Supplies
Any supplies you need in your office to conduct business (pens, paper, etc.) can be included in your business expense deductions. Claim these items on Line 18 of Schedule C (Form 1040).
6. Tools and Supplies
Beyond office supplies, any tools or materials required to run your business can be deducted.
For example, a business computer’s full cost can be added to your list of deductible business expenses the year you purchased it. You can also deduct it, with depreciating value, over 5-7 years. These items are also listed on Schedule C (Form 1040).
7. Repairs and Maintenance Costs
Excluding items that have been replaced, what you’ve spent to repair and maintain your place of business can be claimed as small business tax deductions. For example, reconditioning the floors in your place of business, repairing signage, painting and electrical repair are examples of costs that can be written off on line 21 of Schedule C (Form 1040).
As long as they are not for personal use, utilities — such as heating, electricity, water, sewage and phone services — are tax-deductible business expenses. Itemize these small business tax deductions on line 25 of Schedule C (Form 1040).
9. Internet Services
Internet services are vital to conducting business and are therefore tax-deductible business expenses.
Internet-related services include any domain registration fees and any webmaster consulting costs.
Similar to tools and supplies, if your business requires a specific piece of software to function — like a point of sale system for a food truck or an appointment scheduling system for a doctor’s office — the costs are among small business tax deductions.
11. Employee Benefits
Health plans, sick and vacation pay, accident coverage, welfare benefit funds, life insurance coverage, meal programs and dependent care assistance are all benefits that are eligible for business tax deductions.
For more information, see the IRS’s business expense deductions publication.
12. Employee Wages and Bonuses
If your staff members earn a reasonable wage for their work, employee wages can be deducted. In addition, certain bonuses and awards can be deducted.
Any educational expense that enhances your — or your employees’ — professional standing in your current industry qualifies as a tax deduction.
Use Form 1040, Schedule C to report the costs of any classes, workshops or conferences you’ve attended and document each as professional development.
14. Retirement Plans
Contributions made to your employees’ retirement plans are business tax write-offs on Schedule C (Form 1040).
15. Insurance Premiums
Malpractice, accident, theft, loss, liability as well as fire and storm insurance typically qualify as small business tax deductions. Health insurance can be deducted for self-employed business owners. Any business insurance policy costs, including your homeowner’s insurance if you work out of a home office, are also business tax deductions.
Real estate taxes and income taxes can also be small business tax deductions. Any of these deductions need to be filed via Schedule A (Form 1040).
17. Legal Fees
Legal fees tied to operating your business can be tax-deductible business expenses. This includes business licenses, tax preparation and franchise or trademark fees. Use Schedule C (Form 1040) or Schedule C-EZ (Form 1040) to write off these expenses.
As long as you’re liable for the debt, you can qualify for small business tax breaks on any interest you have paid or accrued during the fiscal year.
If you’re only liable for a portion of a debt, you may deduct only the interest you’re responsible for paying.
19. Startup Costs
If your business is a startup established during the last tax year, you can elect to deduct up to $5,000 in startup costs and $5,000 in organizational expenses — if your total costs are $50,000 or less.
These small business tax breaks allow you to write off expenses required to prepare your business for its first year in operation. Example costs include advertisements, salary and wages for employees and instructors involved in training, costs associated with market analysis and travel expenses incurred while securing customers, suppliers or distributors.
In addition, the claim for organizational costs allows you to deduct legal fees, state fees and travel fees for organizational meetings from your taxable income.
20. Advertising Expenses
Expenses made in relation to promoting your business can typically be deducted. Sole proprietorships and single-member LLCs should file this expense on Form 1040, Schedule C, while partnerships and multi-member LLCs need to use Form 1065.
21. Research and Experimental Costs
The costs of developing or improving an existing product are usually categorized as capital expenses, though you can deduct them as a current business expense.
To learn more about how your organization should expense these costs, see Publication 535, Chapter 7.
22. Credit Card Fees
Processing fees that are applied to every credit card swiped in your business are tax-deductible business expenses.
In addition, a portion of your business credit card usage — including the interest paid and any annual or late fees — can be written off through a few different deductions.
23. Business Meals
Business-related meals provided at the office qualify for a 50% tax write-off. In 2021 and 2022, business meals are 100% deductible if consumed at a restaurant. To claim this as one of your small business tax breaks, you must have a record of the date and location of the meal, an itemized cost breakout of each expense and the business relationship(s) of the person(s) you ate with. One of the best ways to keep track of these expenses is to write down the purpose of the meal and what you discussed on the back of the receipt. To claim business meal expenses, use Form 1040, Schedule C.
24. Charitable Contributions
Any contribution your business has made to a charitable organization registered as a 501(c)(3) is tax-deductible.
C-corporations deduct these costs on their corporate tax returns, while S-corporations, Sole proprietorships, partnerships and single-member LLCs will record these tax deductions on their personal returns, using Schedule A (Form 1040).
25. Dependent Care Expenses
Care provided (while you’re at work or looking for work) for children under the age of 12 or a spouse or relative who cannot care for themselves is tax-deductible. Complete Form 2441 and attach it to Form 1040 to properly file these expenses.
Depreciation enables you to reduce the cost of a high-ticket business expense throughout its lifetime instead of one large deduction. For example, suppose your business has a machine that crafts its primary product. To calculate attributable depreciation, you must estimate its asset life and scrap value (the machine’s components’ worth after it’s no longer useful). If your machine costs $250,000 and is expected to have a value of $75,000 in 5 years, the machine’s depreciation expense is $35,000 per year. The depreciation is calculated by subtracting $75,000 from $250,000 and dividing by 5, equaling $35,000.
This calculation is just one way to determine depreciation for small business tax deductions. We recommend speaking with a certified public accountant (CPA) or another tax advisor to find the best calculation method for your own business.
To learn more about depreciation, see Form 4562.
27. Medical Care
If you’re self-employed, you can deduct your health insurance, doctor’s fees, home care and the cost of prescription drugs. Note that personal medical care deductions are claimed as personal expenses rather than business expenses. In addition, if you’re the policyholder on your family’s plan (spouse and/or dependents), their premiums also qualify as a deduction. To claim medical care costs, use Schedule A (Form 1040).
This category falls under partnership, some LLC and S corporation and sole proprietorship tax deductions. If you own a C corporation or an LLC that’s structured as a corporation, you’re considered an employee of the business rather than self-employed.
How to Write Off Business Expenses
There are 2 categories of tax deductions: standard deductions and itemized deductions.
The standard deduction is a universal dollar amount set by the IRS each year. For example, the standard deduction amount for a married couple filing jointly for fiscal year 2020 is $24,800. A single person or a married couple filing separately has a standard deduction of $12,400. When choosing standard deductions, there are no calculations to make, receipts to submit or additional tax forms to complete. While it’s the most straightforward approach to take, you could miss out on beneficial deductions.
Itemized small business tax deductions, conversely, could further reduce your taxable income than the standard deduction; however, it requires more documentation and calculations. To maximize your tax return, it’s best to work with a tax professional who knows which deductions will best fit your business situation.
Your business’s legal structure will also impact how you file taxes. In a sole proprietorship, your business isn’t considered a separate entity from you, the business owner, so your personal tax return will include details from your business operations.
In addition, the IRS also emphasizes the importance of segmenting your business expenses into the following categories:
Expenses to determine your COGS (cost of goods sold)
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
- Business startup costs
- Business assets
- Business improvements
- General living costs
*It’s possible that many of your capital and personal expenses may be intertwined if there’s a business purpose for the expense. To determine which of your items can be deducted in full and which should be divided, refer to IRS Publication 535.