Many self-employed taxpayers and small business owners don’t take advantage of tax deductions…
Here are some you don’t want to miss!
1. Startup and organizational costs
Our first tax deduction comes with a caveat — it’s not actually a tax deduction. Business startup costs are seen as a capital expense by the IRS, since they are an investment in your business (the money hasn’t actually left the business, it was just transformed into an asset). Deductions for capital expenses typically occur over several years. This is known as amortization, and helps businesses accurately assess profitability year over year. You can check out chapters seven and eight of IRS Publication 535, which covers business expenses for more information.
What you can deduct: Start-up costs generally include the costs to get your business up and running before it opens, such as grand opening advertising, salaries and wages for employees in training, travel to obtain suppliers or customers, or consulting fees.
How it works: You may be able to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs (the costs to set up a legal entity for your business, such as an LLC). However, not everyone gets this deduction. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000.
2. Inventory
Some inventory-based businesses will manufacture products or purchase them for resale. If this is your business model, you can deduct the cost of your inventory, or the cost of the goods you sell. You generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold.
The following are types of expenses that go into figuring the cost of goods sold:
The cost of products or raw materials, including freight.
Storage.
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products.
Factory overhead.
3. Home Office
A portion of your mortgage or rent; property taxes; the cost of utilities, repairs and maintenance; and similar expenses.
What you can deduct: Any utilities that you use for your business are fully deductible. This includes things like water, electricity, trash and telephone bills. However, if you have a home office and use a landline, the cost of the first landline is not deductible, but subsequent landlines are. Note: You can deduct your entire bill if you have a dedicated business cell phone or internet connection.
How it works: Calculate the percentage of your home's square footage that you use, in the IRS’ words, “exclusively and regularly” for business-related activities. Then deduct $5 per square foot of home used for business, up to 300 square feet — that’s about a 17-by-17-foot space. . IRS Publication 587 outlines a lot of scenarios, but note that only expenses directly related to the part of your home you use for business — say, fixing a busted window in your home office — are usually fully deductible.
4. Continuing Education
You have to stay smart to run a growing business, and there are self-employment tax deductions for that.
What you can deduct: The costs of “qualifying work-related education,” including things such as tuition, books, supplies, lab fees, transportation to and from classes and related expenses.
How it works: The expenses are deductible only if the education “maintains or improves skills needed in your present work.” In other words, if you’re taking classes to change careers or you're working toward the minimum educational requirements for a trade or business, this probably won’t work for you. But you can qualify even if the education leads to a degree. Review IRS Publication 970 for the requirements.
5. Business property rent
If you rent your business property, you can deduct your lease or rental payments from taxes. Alternatively, if you run your business from home, you can also run an eligibility test with the IRS to see if you are entitled to any deductions. Types of deductible home business expenses include mortgage interest, insurance, utilities, repairs and depreciation. You can learn more through IRS Publication 587.
6. Auto expenses
If you have a car for business purposes, you can usually deduct anything considered a car expense. However, you have to have records that prove business usage, as well as keep track of your miles. Conversely, you can rely on the IRS standard mileage rate, which is currently $0.58 cents per mile. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Alternatively, you can deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business.
Refer to Publication 463 for information on travel, entertainment, gift, car expenses, and the number of lease payments you can deduct. for more information.
7. Rent and depreciation on equipment and machinery
If you lease equipment or machinery for your business you can fully deduct these costs. This can be anything from printers and copiers, to vans and trucks. You can also claim depreciation on equipment and machinery. However, these costs must be deducted over several years. In order to do this, you must claim a Section 179 deduction, which allows business owners to deduct up to $1,020,000 from new or used property in service during the tax year.
8. Office supplies
Paper, boxes, pens, staples… they may be small, but they all cost money (which you can deduct from your taxes).
For "bigger" stuff like computers or special equipment, the general rule is that you can deduct them in the year you buy them if their useful lives are a year or less. If their useful lives are longer than a year, the IRS may view those things as assets that depreciate over time. Even though this means not being able to deduct the full cost of the item all at once, you likely can deduct the depreciation on the item over its useful life.
Office furniture is also considered a type of office supplies, and can, therefore, be deducted just as you would deduct printer paper or cleaning products.
9. Business travel and meals
Did you know you can deduct 100% of the cost of food or beverages provided by a restaurant?
What you can deduct: Flights, hotels, taxis and food are deductible business expenses as long as they're for actual, legitimate business purposes.
How it works: Instead of deducting the actual cost of each meal, which can require a lot of receipt hoarding, you can use a standard daily meal allowance. Under this method, you deduct a flat amount instead of recording every single meal expense (consider keeping your receipts anyway so that you can prove your deduction if you're audited). The U.S. General Service Administration sets the standard meal allowance rate. Note: You can't deduct travel expenses for your spouse, your kids, or other people unless that person is your employee.
10. Software subscription
If you’ve bought or downloaded software for your business, this can be deducted. These types of expenses can be claimed under “Other Common Business Expenses>Other Miscellaneous Expenses” on your Schedule C tax form.
11. Advertising and marketing
As long as you can prove they’re related to your business, you can claim back any money spent on ordinary advertising and marketing purchases. This includes things like billboards, business cards, Yellow Pages ads, as well as hiring a freelancer to design a business logo or sending thank you cards to clients.
12. The qualified business income deduction
One of the newest self-employment tax deductions out there, the qualified business income deduction (QBI) allows eligible self-employed and small-business owners to deduct a portion of their business income on their taxes.
What you can deduct: If your total taxable income — that is, not just your business income but other income as well — is at or below $170,050 for single filers or $340,100 for joint filers, then in 2022 you may qualify for the 20% deduction on your taxable business income.
How it works: The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include sole proprietorships, partnerships, S corporations and limited liability companies (LLCs).
13. Interest
If you have a small-business loan, you’ll make interest payments on what you’re borrowing from the lender. Those interest payments are usually fully tax deductible as long as the loan is used to cover business expenses. To claim this deduction, the business owner must be legally liable for the debt, and the business owner and the lender must have a “debtor/creditor” relationship. In other words, the loan must be through a traditional lender, and not a friend or family member.
14. Bad debt
If you’ve ever lent money to an employee or vendor without receiving it back, you can claim that back as ‘bad debt’. You just need to be able to prove that it was business debt, rather than personal debt. The IRS defines bad debt as “a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless.”
The following are examples of business bad debts (if previously included in income):
Loans to clients, suppliers, distributors and employees.
Credit sales to customers.
Business loan guarantees.
15. Taxes
As strange as it sounds, the taxes you incur from just running your business are deductible. These taxes might be federal, state and local income, real estate or sales taxes. Your employer taxes, such as the employer share of FICA, FUTA and state unemployment taxes, are also fully deductible.
16. Employee salaries
In general, your employee wages are fully deductible. This includes bonuses and commissions. However, this deduction does not apply to sole proprietors, partners and LLC members, because these individuals are not considered employees.
17. Employee benefits programs
You can also deduct certain employee benefit programs, like education assistance, dependent care assistance, life insurance adoption assistance or qualified retirement plan accounts. For self-employed individuals, contributions to their own retirement plans are personal deductions claimed on Form 1040.
18. Employee gifts
Employee gifts are 100% deductible up to $25 per year, per employee, according to IRS Publication 463.
19. Contracted labor
Do you use independent contractors or freelancers as a part of your labor force? The cost of hiring contracted labor is fully tax deductible. Note that you must issue form MISC-1099 to any contract worker receiving $600 0r more from you in a given tax year. If the employee is being paid via credit card or PayPal, the payment processor must issue the worker form 1099-K.
20. Legal and professional fees
If you ever need to hire a legal or accounting professional for your business, you can deduct 100% of their fees.
21. Insurance
Most businesses will take out some form of business insurance. The cost of the business owner’s health insurance, business continuation insurance and the business owner’s policy are all 100% deductible. Other types of deductible insurance policies include property insurance, liability coverage, malpractice insurance, workers’ compensation costs, auto insurance, business provided employee life insurance and business interruption insurance.
Note that with health insurance, a small business may also qualify for up to a 50% tax credit under the qualified small employer health reimbursement arrangement (QSEHRA).
How to claim small-business tax deductions
To claim small-business tax deductions as a sole proprietorship, you must fill out a Schedule C tax form. The Schedule C form is used to determine the taxable profit in your business during the tax year. You then report this profit on your personal 1040 form and calculate the taxes due from there.