10 key tax deductions for your small business (2024)

Legally lowering your taxable income isn't as thrilling as winning the lottery, but it runs a close second, and it's a lot more likely to happen. If you have a small business, you may benefit from utilizing these 10 deductions. Key deductions include those for home office expenses, health insurance premiums, and startup costs.

1. Home office expenses

Home office expenses are one of the most common small business deductions. Because of its prevalence, the Internal Revenue Service (IRS) designed asimplified optionin 2013 to calculate your home office expense deduction. You may now choose between the simplified and standard deduction calculations.

• The standard option requires that you calculate the percentage of your home that is for business versus personal use, then apply that percentage to all your qualifying expenses such as mortgage interest, utilities, and insurance. To do this, you will need to keep detailed records on all relevant expenses.
• The simplified option allows you to take a standardized $5 per square foot of home office space, up to 300 square feet or $1,500, as a home office deduction.

2. Startup costs

Startup and organizational costs for a small businesscan be deducted up to $5,000 each. The allowable startup deduction is reduced by the amount your total startup or organizational costs exceed $50,000; the remainder must be amortized. Startup costs refer to any amounts paid to investigate or create a business. Organizational costs include the expenses incurred toform a corporation, partnership, or limited liability company (LLC).

3. Insurance premiums

Certain insurance premiumsare deductible for small businesses. Insurance premiums for fire, theft, or accident losses are deductible. Liability, malpractice, workers' compensation, unemployment, business interruption, and car insurance are generally deductible, subject to certain criteria. Please note, car insurance is only deductible to the extent the car is used for business.

Health and long-term care (LTC) insurance paid by a partnership for its partners is generally deductible as a guaranteed payment to the partners. Health or LTC insurance paid for by an S corporation for shareholder-employees who hold a 2% or greater stake in the company is generally deductible as well. However, it must also be included in the shareholder's wages which are subject to federal income tax.

4. Vehicle-related expenses

As in the previous section with car insurance, other car-related expenses are only deductible to the extent the car is used for business. Keep detailed records of your business travel to substantiate your deduction if your car is used for both business and pleasure.

To deduct mileage driven for work, you can either select thestandard mileage rateor the actual expense method. The standard mileage rate, set annually, is simply multiplied by the business miles you drove. Alternatively, you could also keep records of all your car-related expenses, including depreciation, registration, car insurance, repairs, and gas. The percentage of business use for your vehicle is applied to the actual expenses to arrive at your deduction. For example, if you had $2,000 in car-related expenses and drove your vehicle for business 50% of the time, your deduction is $1,000.

5. Phone and internet expenses

You can deduct phone and internet expenses, regardless of whether you claim the home office deduction, so long as the expenses are directly business-related. For example, you cannot deduct the first line of your home phone. However, if you have a second line devoted to business, you can deduct the additional cost related to your second line.

6. Advertising expenses

Reasonable costs incurred to advertise your business are tax-deductible. Lobbying expenses are not typically tax-deductible.

7. Travel expenses

Travel expenses may be tax deductible if they are ordinary and necessary for your business. The travel must take you out of the area of your regular place of business, last for substantially longer than a typical workday, and you must need to sleep or rest to perform the demands of your work away from home. To substantiate your deduction, keep detailed records of your business-related travel expenses, including transportation, lodging, and non-entertainment-related meals.

8. Education expenses

You can deduct education expenses that are required for maintaining or improving your skills related to your business. It must be related to your current line of work, rather than a new trade or business.

9. Retirement plan contributions

Contributions to SEP, SIMPLE, or qualified retirement plans may be tax deductible. You can deduct contributions made to the plan for your employees. If you are a sole proprietor, you can also deduct contributions made to the plan for yourself.

10. Self-employment taxes

Self-employment taxes, which fund Social Security and Medicare, are paid by independent contractors and small business owners. The total self-employment tax rate is 15.3%. Because you are both the employer and the employee of the small business, 7.65% is essentially the employer share, and 7.65% is the employee share. When filing your income taxes, you will be able to deduct the employer half of the self-employment tax as a business expense.

This is a broad overview of 10 common deductions for small businesses. There are many other small business deductions. The main takeaway is, that no matter what business expense you're deducting, it must be reasonable and directly related to your business.

What small business owners should know about depreciation

Depreciation deductions offer a significant financial benefit to small businesses, allowing them to save on taxes, invest in growth, and improve their financial health. By understanding the rules and applying them strategically, small business owners can leverage depreciation to their advantage.

However, it’s important to remember and understand the complexity and the limited applicability. Not all assets qualify for depreciation, and deductions are subject to various rules and limitations.
Here are some of the benefits:

• Lower taxable income and improved cash flow.
• Accelerated investment, incentive to purchase assets, and strategic timing of deductions.
• Improved financial planning, predictable expenses, and enhanced financial reporting.
• Additional benefits include simplified record-keeping and flexibility in asset management.

Businesses may depreciate property that meets all these requirements. The business must:

1. Own the property. The business is considered to own property even if it is subject to a debt.
2. Use the property in a business or income-producing activity. If the property is used to produce income, then the income must be taxable. Property that's used solely for personal activities can't depreciate.
3. Be able to assign a determinable useful life to the property. This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
4. Expect the property to last more than one year. It must have a useful life extending beyond the year a business places it in service.
5. Not depreciate excepted property. Excepted property includes certain intangible property, certain term interests, equipment used to build capital improvements, and property placed in service and disposed of in the same year.