A Quick Primer on Business Tax Deductions
When the IRS determines that you've paid them less than what's due, the consequences can be dire. But when you underestimate your tax deductions and credits, guess what? You're on your own – and you run the risk of leaving money on the table.
When they're most effective, deductions can put you into a lower tax bracket – and who doesn't like that? So if you've been dragging on getting your business taxes reconciled, hopefully this list of the typical and less obvious deductions you can take on your federal taxes (don't forget those state and/or local taxes, if applicable) will help you get in gear.
The Standard Deductions
Some of the more predictable deductible business expenses.
- Mortgage interest and rent. Businesses operating on commercial premises can deduct rent and mortgage interest.
- Home office. You must use the space for business purposes only – no family rooms, bedrooms, or kitchen nooks allowed. If you have an eligible space, you can deduct a percentage of your rent or mortgage interest, home insurance, and utilities. If this sounds complicated, you may instead opt to take a flat $5.00-per-square-foot deduction, with a maximum deduction of 300 square feet, or $1,500.
- Home-office Internet and phone. You may deduct a portion of your household phone and internet bills, based on the percentage you use for business. If you buy a phone solely for business purposes, you can write off any depreciation on the hardware. Online communication tools, such as a Zoom subscription or a Skype number, are 100 percent deductible, as are wi-fi expenses when traveling.
- Business insurance. Deductions may apply to fire, theft, and liability policy premiums as well as worker's compensation coverage and policy types exclusive to certain industries – such as a publication taking out liable insurance.
- Bank fees and interest. Eligible deductions include account startup and monthly maintenance fees, overdraft fees, and costs for additional services, such as lines of credit.
- Startup costs. New businesses often incur large upfront expenses. These may include research, recruiting, training, or travel costs associated with developing a business plan and establishing a company, among other line items.
- Individual Retirement Account (IRA) contributions. You can contribute a maximum of between $6,500 and $7,500 per year to a traditional IRA. In comparison, 401k contribution limits are much higher. In 2023, the IRS raised limits to $66,000 per year for people under 50 and $73,500 per year for older account holders. Note that contributions to both owner and employee retirement accounts are tax-deductible.
- Auto expenses. Only a business owner can deduct automobile expenses. If you use the car for business purposes only, you may deduct gas, maintenance, leasing, and insurance costs. If you're using a vehicle for business and personal reasons, you can deduct only the work-related use. Equipment and vehicle leases considered necessary for the business are also deductible.
- Business Travel, Meals, and Entertainment. ou can deduct the expense of transportation, accommodations, and car rentals for business trips. If you treat their client or employees to a meal, party, or other entertainment, you may deduct all or part of the related expense. You'll want to track these expenses carefully, since the tax rules around them are nuanced. Some meals can be 100 percent deductible while others are at only 50 percent.
- Small businesses can claim the entire cost of providing employees with free work lunches.
- Food and beverages for free promotional events are completely deductible.
- In general, other meals are 50 percent deductible. Dinner with clients is one example.
- Client entertainment expenses have been 0 percent deductible since 2018.
- Charitable donations. Charitable donations can include pro-bono services, volunteer hours, cash, or goods with a monetary value.
- Education. Courses or programs that are required by law or improve the business are typically deductible. If you're an established masseuse, for example, you can claim professional development courses that improve your technique.
A Few Deductions you May Not Know About
When you do your research or work with a CPA on your taxes, you won't miss out on some lesser-known deductions.
- Accounting Fees. Thankfully, the IRS recognizes accounting expenses (whether that's software-based advice or the wisdom of an accountant) as necessary expenses. Fees can range from a nominal software subscription to thousands of dollars for a CPA.
- Marketing, advertising, or other professional services. ou may hire an agency or a consultant to help you create and distribute social media ads, print ads, and commercials. However, some limits apply. You can't, for example, write off lobbying and other types of politically-influenced marketing.
- Health insurance premiums. Small business owners often pay out-of-pocket for their health coverage. If this applies to you, you're covered for your policy premiums.
- Licensing fees. Businesses in a regulated profession – for example, a liquor store or a spa – may need to pay for a state, county or city license. Note that claiming deductions for business license fees is less straightforward than other expenses. Talk with a licensed tax preparer before writing off these costs.
- Moving expenses. Deductible moving expenses are strictly limited to the cost of an office relocation.
Though this is not an exhaustive list of federal deductions, it gives you a better idea of the broad range of deductions possible. As you prepare your return or work with a tax professional on it, be sure to consult the IRS's Small Business Tax Guide for more granular information on deductions and much more.
Did You Know?
Get up to Speed on this Year's Tax Changes
The IRS is constantly updating its rules and regulations. Here's what businesses need to know before completing their 2023 tax return.
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