One of the simplest ways to reduce your income tax bill is to ensure you’re claiming all of the tax deductions available to your small business.
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Example H2 Example H3 Example H4 Example H5 Example H6 Tired of doing your own books?A tax deduction (or “tax write-off”) is an expense that you can deduct from your taxable income. You take the amount of the expense and subtract that from your taxable income. Essentially, tax write-offs allow you to pay a smaller tax bill. But the expense has to fit the IRS criteria of a tax deduction.
Below you’ll find a comprehensive list of write-offs commonly available to self employed businesses that are organized as sole proprietorships or partnerships. Some of these are directly related to running a business, and some are more personal deductions that a small business owner should be aware of.
Making the most of all your available tax deductions can save you hundreds—even thousands—of dollars at tax time.
Let’s look at an example.
Joe is a self-employed writer and had $60,000 in self employment income in 2023. He has to pay 15.3% self employment (SE) tax plus income tax based on his individual tax rate. The SE tax on $60,000 is $8,478 (generally only 92.35% of SE income is subject to SE tax) and the income tax is $4,865, for a total of $13,343.
(For simplicity, we assumed Joe is single with no children and no other types of taxable income to consider.)
In early 2023, Joe joined Bench and his bookkeeper located $6,000 worth of contractor expenses that he was not aware of. These expenses count as tax deductions and reduce his net self employment income to $54,000.
Now, with $54,000 in taxable self employment income, he pays $7,630 in SE tax and $4,200 in income tax, for a total of $11,830.
Adding the additional business expenses saved Joe over $1,500 in taxes!
By locating the $6,000 in contractor expenses, Bench was able to reduce Joe’s tax liability by over $1,500 dollars. A nice saving he can use to upgrade his laptop this year.
Repeat this for all the available deductions Joe had expenses for, and he can significantly reduce the income he has to pay taxes on—saving him thousands of dollars.
As a small business owner, it can be difficult to know what deductions are relevant to you.
Many people struggle to stay on top of their deductions year round and instead try to piece things together at year end and run into difficulties. Remember that restaurant expense you incurred in January last year? Most people don’t, and therefore they miss this tax write off. Add them all up and you’re missing out on a lot of tax savings.
To claim these deductions, you’ll need to keep accurate records and stay on top of your monthly bookkeeping.
Ongoing bookkeeping is critical to help you tally up your deductions. If you don’t have a good DIY setup you’re happy with, check out Bench. We’ll do your bookkeeping for you.
When Bench does your bookkeeping, we catch these deductions every month so you have confidence you’ve caught everything and minimized your tax liability. Then at year end, send Bench’s books to your accountant. Or, let us take tax filing off your plate for good with Bench’s small business tax support—we’ll do your bookkeeping and tax filing for you. Consider your tax season headache free!
Each of these expenses are tax deductible. Consider this a checklist of small business tax write-offs.
And remember, some of the deductions in this list may not be available to your small business. Consult with your tax advisor or CPA before claiming a deduction on your tax return.
Click the links below to skip ahead to a specific deduction, or keep scrolling to learn about them all.
The cost of advertising and promotion is 100 percent deductible. This can include things like:
However, you cannot deduct amounts paid to influence legislation (i.e., lobbying) or sponsor political campaigns or events.
Having separate bank accounts and credit cards for your business is always a good idea. If your bank or credit card company charges annual or monthly service charges, transfer fees, or overdraft fees, these are deductible. You can also deduct merchant or transaction fees paid to a third-party payment processor, such as PayPal or Stripe.
You cannot deduct fees related to your personal bank accounts or credit cards.
You can generally deduct 50% of qualifying food and beverage costs. To be eligible for the deduction:
You can deduct 100% of the cost of providing meals to employees, such as buying pizza for dinner when your team is working late. Meals provided at office parties and picnics are also 100% deductible.
Be sure to keep documentation for the outing that includes the amount of each expense, the date and place of the meal, and the business relationship of the person you dined with. A good way to do this is to record the purpose of the meal and what you discussed on the back of the receipt.
You can deduct the premiums you pay for business insurance.
This may include:
Do you use your vehicle for business? If you use your vehicle solely for business purposes, then you can deduct the entire cost of operating the vehicle. If you use it for both business and personal trips, you can only deduct the costs associated with business-related usage.
There are two methods for deducting vehicle expenses, and you can choose whichever one gives you a greater tax benefit.
Both methods require that you track your business miles for the year. You can keep a detailed log of your business miles, use an app to track your trips, or reconstruct a mileage log using other documents, such as calendars or appointment books. If you keep a mileage log, clearly document the miles driven, time and place, and business purpose of your trip.
Note that you cannot count the miles driven while commuting between your home and your regular place of business. These costs are considered personal commuting expenses.
If you hire freelancers or independent contractors to help in your business, you can deduct their fees as a business expense.
Just remember, if you pay a contractor $600 or more during the tax year, you’re required to send them a Form 1099-NEC by January 31st of the following year.
When you purchase furniture, equipment, and other business assets, depreciation rules require you to spread the costs of those assets over the years you’ll use them rather than deducting the full cost in a single hit.
Expensing these items upfront is more attractive because of the quicker tax benefit. Fortunately, the IRS gives business owners several ways to write off the full cost in one year.
If you purchased a new vehicle during the tax year, the IRS limits write-offs for passenger vehicles. In the first year, if you don’t claim bonus depreciation, the maximum depreciation deduction is $10,100. If you do claim bonus depreciation, the maximum write off is $18,100.
Depreciation is more complicated than your average deduction, so we recommend reading our article What is Depreciation? And How Do You Calculate It?, and asking your accountant which assets you can deduct in your business.
Education costs are fully deductible when they add value to your business and increase your expertise. In order to decide if your class or workshop qualifies, the IRS will look at whether the expense maintains or improves skills that are required in your current business.
The following list contains examples of valid business education expenses:
Keep in mind that any education costs that would qualify you for a new career, or costs related to education outside of the realm of your business, don’t qualify as business tax deductions.
If you use a home office for your business, you may be able to deduct a portion of your housing expenses against business income. There are two ways to deduct home office expenses.
To qualify for the home office deduction, you need to measure up in two areas:
If you use the standard method for calculating your home office deduction, you’ll need to file Form 8829 along with your Schedule C. Learn more about the home office deduction.
If you take out a loan or use a credit card to cover business expenses, you can deduct the interest paid to your lender or credit card company as long as you meet the following requirements:
Keep in mind that if a loan is part business and part personal, you need to divide the interest between the business and personal parts of the loan.
Legal and professional fees that are necessary and directly related to running your business are deductible. These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services such as Bench.
If the fees include payments for work of a personal nature (for example, making a will), you can only deduct the part of the fee that’s related to the business.
The Tax Cuts and Jobs Act of 2017 eliminated the deduction for moving expenses for all nonmilitary individuals, but businesses can still deduct the cost of moving business equipment, supplies and inventory from one business location to another.
Be sure to keep good records to substantiate all costs associated with your business move.
If you rent a business location or equipment for your business, you can deduct the rental payments as a business expense.
Keep in mind, rent paid on your home should not be deducted as a business expense, even if you have a home office. That rent can be deducted as a part of home office expenses.
Salaries, benefits and even vacation time paid to employees are generally tax-deductible, as long as they meet a few criteria:
You can deduct various taxes and licenses related to your business. This may include:
If telephone and internet services are integral to your business, they can be deductible business expenses.
Keep in mind, if you use a landline at home, you cannot deduct the cost of your first line, even if you use it solely for work. However, if you have a second landline devoted to the business, the cost of that line is deductible.
If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the percentage allocable to business use. Keep an itemized bill or other detailed records to prove the amount of business use in case your return is audited.
For a trip to qualify as business travel, it has to be ordinary, necessary, and away from your tax home. Your tax home is the entire city or area in which you conduct business, regardless of where you live. You need to travel away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route.
Deductible, IRS approved business travel expenses include:
Remember to keep records that include the amount of each expense, as well as dates of return/departure, details of the trip (whom you met with), a mileage log if you drove your own vehicle, and the business reason for the trip.
The above-mentioned deductions can be claimed on Schedule C or Form 1065’s Schedule K-1, but there are a few other tax breaks small business owners commonly claim on their individual returns.
Sole proprietorships, LLCs, and partnerships cannot deduct charitable contributions as a business expense, but the business owner may be able to claim the deduction on their personal tax return.
To qualify, the donation must be made to a qualified organization.
Starting with 2020 returns, taxpayers can claim up to $300 of cash contributions as an “above-the-line” deduction on Form 1040. To deduct more than that, the business owner has to itemize deductions on Schedule A attached to Form 1040.
If you pay someone to care for a child or another dependent while you work, you may be able to claim the Child and Dependent Care Credit. To qualify, the person receiving the card must be a child (under age 13) or a spouse or other dependent who is physically or mentally incapable of self-care.
The credit is worth between 20% and 35% of your allowable expenses, depending on your income. Allowable expenses are limited to $4,000 for the care of one dependent and $8,000 if you paid for the care of two or more dependents. IRS Publication 503 provides more information on the Child and Dependent Care Credit. You’ll need to attach Form 2441 to your Form 1040 to claim the credit.
You can deduct contributions to employee retirement accounts as a business expense. The amount you can deduct depends on the type of plan you have. Check out the IRS’s tips for calculating your own retirement plan contribution and deduction for more information.
In addition to insurance premiums, you can deduct other out-of-pocket medical costs, such as office co-pays and the cost of prescriptions. These costs are normally included on itemized deductions on Schedule A.
Self-employed business owners can also deduct health insurance premiums for themselves, their spouse, and dependents on Schedule 1 attached to their Form 1040. However, if you are eligible to participate in a plan through your spouse’s employer, then the business can’t deduct those premiums.
Tax deductions are an essential way to minimize the amount of tax you have to pay, and good record keeping will ensure you get to keep those deductions if the IRS ever comes knocking.
Have your team of dedicated bookkeepers at Bench track all of the expenses related to running your business to ensure you’re taking advantage of every legitimate deduction. Send Bench’s books to your accountant at year end, or let us take the tax filing off your plate for good! Learn more.
Our friends at Gusto put together a handy list of store deductions and startup tax deductions.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
