Small business tax deductions can trim your tax bill
9 min read
January 03, 2023 • Block Advisors
One of the best ways to reduce your overall tax bill is through small business tax deductions. While some might be well known, there may be a few obscure business expense deductions to know about to help you reduce what you owe.
In this post, we’ll outline the common small business tax deductions and business write offs, itemized with a list of deductible business expenses.
Table of Contents
- What is tax deductible for a small business?
- When do you know it’s a tax-deductible business expense?
- 1 – Advertising and promotions
- 2 – Meals
- 3 – Business use of your car
- 4 – Business travel
- 5 – Business insurance
- 6 – Cost of goods sold
- 7 – Contract labor
- 8 – Depreciation
- 9 – Home office expenses
- 10 – Taxes
- 11 – Professional services and legal fees
- 12 – Retirement contributions
- 13 – Startup costs
- 14 – Qualified business income tax deduction
- Related: Net operating loss
- Best practices for tax-deductible business expenses
- How to claim business expense deductions
- Help for small business tax deductions for 2023 tax returns
What is tax deductible for a small business?
Often our clients will ask, “what is tax deductible for a small business?” Although it’s not a one-size fits all scenario (as explained below), we’ll cover a range of potential tax-deductible business expenses that can lower your tax bill.
Don’t want to tackle tax deductions alone? Get help with small business tax breaks and questions from the team at Block Advisors.
When do you know it’s a tax-deductible business expense?
Before we share a list of deductible business expenses, we have an important message to share. To know how to deduct business write offs or expenses from your small business tax return, you should have a good understanding of what is considered a business expense in the eyes of the IRS.
Frankly, it’s important to not confuse personal expenses with your business expenses. A business expense should be both necessary to the function of the business and ordinary to the business:
- A necessary business expense is one which is considered useful and relevant to your industry.
- An ordinary business expense is one which qualifies as something commonly accepted in your industry.
1 – Advertising and promotions
Advertising and promotional activities are defined as a small business expense incurred to help boost sales and revenue. You can deduct reasonable advertising expenses directly related to your small business. Think online advertising costs as well as print. Anything to spread the word about your business purpose qualifies.
Note: You can’t deduct activities related to influencing political legislation, such as lobbying.
2 – Meals
Believe it or not, meals are an allowable small business tax deduction. In 2022, there was an exception to the typical 50% tax write off. Specifically, you could deduct 100% of your bill at most restaurants and bars as long as:
- The meal was ordinary and necessary to your business
- One of the business owners or an employee was present
- You met with a business contact – like a contractor, vendor, or client
- The meal wasn’t deemed extravagant or lavish
The law is now back to its usual 50% tax write off rate in 2023.
3 – Business use of your car
The Internal Revenue Service states that if your car is used solely for your small business, you can deduct its full cost of ownership and operation. But, if your vehicle is used for both business use and personal use, you can only deduct the cost of the business use.
Use the standard mileage rate times the amount of miles you drive to calculate the business use of your car and arrive at the mileage deduction you can take. You may also track your actual expenses instead of mileage. Find out more in our post about writing off a car for business use.
4 – Business travel
Traveling for work? This is another small business deduction. If your business travel takes you away from where you typically conduct business, you can deduct the related travel expenses.
Learn more about business travel tax deductions.
5 – Business insurance
Business insurance policies are a business expense deduction. You can deduct the full cost of insurance as it relates to your business. Common business insurance plans small business owners might choose to buy include general liability, property, casualty, and business interruption insurance.
6 – Cost of goods sold
If your small business makes and resells products, you should value your inventory at the beginning and end of each tax year to figure out the cost of goods sold.
Raw materials, storage, labor costs, and factory overhead all factor into figuring out the cost of goods sold. There are a few rules about cost of goods sold, however. One of the main ones is this: if you include an expense in the cost of goods sold, you can’t also deduct it.
7 – Contract labor
Did you know that hiring contractors (i.e. those paid via Form 1099) is a small business tax break? Say you’re a self-employed graphic designer and you recently come into more work than you can take on yourself. If you sub-contract the work to another graphic designer, you can actually write off the cost of their wages on your own taxes.
8 – Depreciation
You can deduct depreciation of business property as a small business. Normally you deduct the cost over the course of a few years. This is known as depreciation. You should use Form 4562 to claim depreciation deductions. On the other hand, you can elect to take bonus depreciation – which will start to phase down in 2023 – or use the Section 179 deduction to deduct the full cost of the asset in the year it is purchased. For more information on the depreciation schedule, read our article!
9 – Home office expenses
Many people wonder about the benefit of home offices from a tax standpoint. While employees can no longer deduct home office expenses, this isn’t the case for small business owners. Home office expenses like real estate tax, depreciation, dwelling insurance, equipment, and a percentage of your mortgage interest can be used as a home office deduction to offset your small business’ taxable income.
Learn about the best practices on taking the home office deduction.
10 – Taxes
Small business owners have a higher tax burden than individual filers due to self-employment tax, but there are more small business tax deductions available as well. One of the things you can deduct is taxes.
Generally, the IRS permits you to deduct some local, state, and federal tax related to your business as a small business expense. Here are some examples of an allowable tax write off:
- Some business entities can deduct state taxes.
- If you have employees, you can deduct payroll taxes.
- You can deduct real estate taxes if your business owns property.
- You can deduct excise tax if it’s collected.
- You can deduct business vehicle registration tax if your car is used for business purposes.
- You can even deduct the cost of tax preparation!
11 – Professional services and legal fees
Your small business may require help from other services or professionals as it grows and evolves. In this case, the Internal Revenue Service (IRS) allows you to deduct professional services and legal fees.
12 – Retirement contributions
Tax-qualified retirement accounts owned by a small business owner can be deducted. You can deduct your IRA contributions from your overall net profit.
Learn more about retirement contributions and your taxes as a small business owner.
13 – Startup costs
When you start a business, you may have heaps of one-time expenditures. Luckily, these costs may be tax-deductible. You can deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs. The tax deduction is reduced if the expenses exceed specified limits and any remaining expenses can be amortized.
Common start-up and organizational costs include:
- Advertising and promotional fees
- Cost of acquiring an existing business
- Cost of wages associated with training employees or contractors
- Customer surveys
- Licensing and permitting fees
- Market and product research
- Office rent and utilities paid prior to your business launch
- Professional and legal fees
14 – Qualified business income tax deduction
Have you heard about the qualified business income tax deduction? It’s a beneficial deduction that offers a tax reprieve by providing a deduction of up to 20% of a business’s qualified business income. Qualified business income includes:
- Income connected with running a trade or business.
- Income from partnerships (other than publicly traded partnerships), S corporations, and sole proprietorships.
- Qualified items of business income, gain, deduction, and loss from the sale of goods or services allowed in calculating taxable income for the tax year.
A separate component of the qualified business income deduction covers qualified publicly traded partnership income.
Related: Net operating loss
A net operating loss (NOL) happens when a small business has more tax deductions than taxable income. In fact, NOL is a technical word for negative income. Get more details on business losses.
Best practices for tax-deductible business expenses
Tracking business expenses as you go should be a top priority for small business owners. Here’s why: It’s hard to backtrack weeks or months. You’ll spend more time and energy trying to find and remember your expenses — and will have potentially less accuracy doing so. You could easily miss a deduction if you don’t track as you go.
Luckily, Block Advisors is here to help. We have in-person and online bookkeeping services to keep you on course. Let a Block Advisors accountant give you a hand to ensure your books are accurate and up-to-date.
How to claim business expense deductions
The tax forms you use to deduct business expenses depends on the type of business entity you formed.
- Sole proprietor or single-member LLC , should use Schedule C .
- Partnerships should fill out Form 1065. Plus, you should report your share of income and expenses on Schedule E.
- C corporations should fill out Form 1120.
- S corporations should fill out Form 1120S . Plus, you should report your share of income and expenses on Schedule E.
Remember: tax forms have different due dates. Get help determining when business tax deadlines are.
Help for small business tax deductions for 2023 tax returns
While you have many strengths as a business owner, you’re not alone if small business taxes and bookkeeping intimidate you. Luckily, Block Advisors is here to help! Whether you’re looking for small business tax breaks, bookkeeping, payroll, or general small business tax guidance, we have an expert ready to assist you.
Our tax professionals are well versed in these tax nuances — plus you have the help of experienced bookkeeping and payroll experts as well. In addition, if you need help organizing your receipts, expenses, and other documents, use our Year-End Tax Filing Readiness service. Work with a tax professional who can get your paperwork in order, helping you avoid missed deductions, for just $50 per hour.
Get help from the Block Advisors small business certified tax pros and accountants. Keep your business on track so you can focus on what you love.
Connect with an expert near you now.