Benjamin Franklin once said, 

      ‘In this world, nothing can be said to be certain except death and taxes.’ 

Imagine you’ve just made a delicious batch of cookies, but first, you have to give a few to the taxman to enjoy the rest. That’s what business tax is, in a nutshell—the cut the government takes from your business’s profits. 

Taxes are a financial and administrative burden that directly impacts small businesses by taking away a chunk of their profits. Even in NFIB’s 2021 Tax Survey, tax-related issues rank highest among small business problems. 

Of the top ten most burdensome problems small business owners report, four are tax-related.

At the top of the tax list, federal taxes on business income ranked as the third most severe problem, with 20% reporting it as a critical issue. 

Luckily, business tax rates aren’t all bitter pills. Small businesses have some secret weapons up their sleeves, including tax deductions. Think of them like the cheat codes in a video game that make a tough challenge easy. 

Tax deductions can significantly reduce the tax burden of small businesses. You can subtract things like business expenses or the wear and tear of your business gear (we’re talking about depreciation) to lower your tax bill significantly.

However, this is the trickiest part of tax filings since there is a fine line between which expenses are deductible expenses and which are not.

If you are confused or just want to learn more, this blog will walk you through the often-overlooked tax breaks explicitly designed for you! 

By the end of this blog, you will learn how to keep most of your revenue in tax deductions with doola’s tax services. We will ensure that you take advantage of all available deductions while staying compliant with the laws and regulations.

Say goodbye to confusion and frustration—it’s time to empower yourself with the knowledge to help your business thrive!

Dive in as we unpack everything from office supplies to home offices, ensuring you’re not leaving any money on the table. 

What Is a Tax Deduction?

A tax deduction or “tax write-off” is an expense that decreases the portion of your earnings that are subject to tax. In simple terms, tax write-offs allow you to pay a much lower tax bill, but only if the expense fits the IRS criteria of a tax deduction.

They are usually designed to offset critical business expenses, like the interest on your loans.

These expenses can be anything, from a company-wide retreat to a fancy steak dinner with your biggest client, as long as they are necessary and reasonable for the business to operate.

To qualify as a deduction, an expense must be both “ordinary” and “necessary” for your business operations.

Ordinary expenses refer to those common and accepted in your industry, while necessary expenses are those that are helpful and appropriate for running your business.

Now, which expenses may be written off may vary depending on the nature of your business.

We’ll walk you through the different deductions your business can take advantage of so you can save big on your tax return.

From leveraging home office deductions to capitalizing on education credits, this comprehensive guide equips you with the knowledge to help you optimize your tax situation and keep more money in your pocket.

The Big List of Small Business Tax Deductions

Now, let’s say you’re going on a quest to find lucrative tax deductions that will require some direction. We will act as your guide to help you avoid financial pitfalls and safely navigate the complex tax landscape.

Below, you’ll find a comprehensive list of write-offs commonly available to small businesses that are organized as sole proprietorships, LLCs or C-Corps.

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.

Before you file, take a look through this list to jog your memory on deductions you might be missing.

Advertising and Promotion

The IRS allows small businesses to deduct 100% of the costs of advertising and promoting their products or services from their taxable income. You can claim deductions for:

• Hiring a designer to design a business logo

• Cost of printing business cards or brochures

• Purchasing ad space in print or online media

• Employee wages for handling advertising and promotion

• Sending cards to clients

• Building and launching a new website

• Running a social media marketing campaign

• Sponsoring a corporate event

However, you cannot claim deductions for amounts paid to influence legislation (e.g., lobbying), travel expenses incurred while attending trade shows or conferences, and sponsorship of political campaigns or events.

Bank Fees 

Opening a business bank account allows you to use banking services such as credit cards, money transfers, and other financial products. However, these services incur charges or fees that can quickly add up and become a significant expense for small businesses.

The good news is that many of these bank fees can be claimed as deductions on your taxes. The Internal Revenue Service (IRS) allows business owners to deduct bank or credit card company charges, annual or monthly service charges, transfer fees, or overdraft fees. 

You can also deduct merchant or transaction fees paid to a third-party payment processor, such as PayPal or Stripe. However, you must remember that not all bank-related expenses are tax-deductible. 

For example, penalties for late payments or insufficient funds cannot be claimed as deductions since they do not directly relate to operating your business. You cannot deduct fees related to your personal bank accounts or credit cards.

Business Meals

Meals and entertainment can be a great opportunity for small business owners to network, build relationships, and appreciate their employees.

Thankfully, the IRS allows for a tax deduction on business meals that can help alleviate some of the costs associated with these meetings.

You can generally deduct 50% of food and beverage costs for business meals with clients or office snacks. However, you can deduct 100% of the cost in some cases, like providing meals to employees when they are working late and the following:

• A company-wide holiday party

• Meals that are provided at office parties and picnics

• Food and drinks that are provided free of charge for the public

• Food included as taxable compensation to employees and included on the W-2

To qualify for this deduction, the meal must be considered “ordinary and necessary” for your business. It should not be excessive or extravagant and must be directly related to your business activities.

Plus, the business owner or an employee must be present at the meal.

While most work-related meals are either eligible for 100% or 50% deductible, there are a few exceptions. For example, if you organize a night out for your clients but you don’t actually go with them, it’s nondeductible.

Business Insurance

The IRS allows businesses to deduct the cost of insurance premiums paid for policies that cover their trade or business operations. 

This includes all forms of insurance, such as general liability, professional liability, property insurance, workers’ compensation, and even health insurance for employees.

In addition to these standard types of insurance coverage, your business may require other specific insurance policies. This may include:

• Insurance for your furniture, equipment, and buildings

• Group health, dental and vision insurance for employees

• Auto insurance for business vehicles

• Life insurance that covers employees, as long as the business or business owner is not a beneficiary on the policy

• Business interruption insurance that covers lost profits if your business is shut down due to fire or another cause

Depending on your industry and location, you may need more comprehensive insurance coverage for incidents like property damage, liability claims, or even employee injuries.

You can select from a wide range of tailored insurance plans by NEXT Insurance to determine the best coverage for your specific needs and to ensure you’re maximizing your tax deductions.

Business Use of Your Car

If you use your personal vehicle for business purposes, you may be eligible to deduct a portion of your car expenses on your tax return. This can include everything from travel expenses to maintenance and repairs. 

If you use your vehicle solely for business errands, then you can deduct the entire cost of operating the vehicle. But if you use it for both business and personal errands, 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.

The standard mileage method allows you to deduct a set amount per mile driven for business purposes ($0.655 per mile in 2023). 

On the other hand, the actual expense method allows you to deduct the percentage of car expenses that are related to business use, such as gas, insurance, repairs, and depreciation.

Multiply those travel expenses by the percentage of miles driven for business. However, you cannot switch from the actual expense method to the standard mileage method on the same vehicle.

Hiring Contract Labor

If you hire freelancers or independent contractors, you can deduct their fees as a business expense. This includes freelancers, consultants, and self-employed individuals who are not considered employees of your business.

To claim this deduction, you must ensure that all contract workers have signed a valid Form W-9 before they begin working for your business. This form certifies that they are not considered employees and, therefore, exempts you from withholding taxes on their behalf. 

Also, if you paid a contractor $600 or more during the tax year, you must send them a Form 1099-NEC by January 31st of the following year.

Depreciation

Depreciation is a tax deduction that allows small businesses to write off the cost of certain assets over time. This can include equipment, vehicles, buildings, and even intangible assets like patents or copyrights. 

The most commonly used method for calculating depreciation is called the straight-line method, which spreads out the cost of an asset evenly over its useful life. 

It allows you to spread the costs of those assets over the years you’ll use them rather than deducting the full cost at one time. 

For example, if you purchase a piece of equipment for $10,000 with a useful life of 5 years and no salvage value, your annual depreciation expense would be $2,000 ($10,000/5 years). 

However, claiming these expenses in one go is more attractive because of the quicker tax benefit. Fortunately, the IRS gives small business owners several ways to write off the full cost in one year.

The Section 179 Deduction allows business owners to deduct up to $1,080,000 in business equipment purchases each year instead of depreciating them over time. This includes new and used business property and “off-the-shelf” software.

Under De Minimis Safe Harbor Election, small businesses can choose to expense assets that cost less than $2,500 per item in the year they are purchased. 

Small businesses can also take advantage of Bonus Depreciation to deduct up to 100% of the cost of qualifying assets in their first year instead of spreading it out over multiple years.

Education

Education costs are 100% deductible when they add value to your business and enhance your skills. This means that the course or program must improve your existing skills or knowledge or qualify you for new opportunities within your business field.

The first thing to keep in mind when claiming education as a tax deduction is that it must be directly related to your business or trade. The IRS will look at whether the expense maintains or improves skills that are required in your current business.

For example, if you own an accounting firm and attend courses on advanced bookkeeping techniques, it would qualify as a deductible expense because it directly relates to your field of work.

Various educational expenses can be deducted from taxes, including tuition fees, books and supplies, and even software or equipment necessary for the course. Other valid business education expenses include:

• Classes to improve skills in your field

• Seminars and webinars

• Subscriptions to trade or professional publications

• Books tailored to your industry

• Workshops to increase your expertise and skills

• Transportation expenses to and from classes

It’s essential to keep detailed records of these expenses as they will need to be reported on Form 1040 Schedule C when filing taxes.

Legal and Professional Fees 

Legal and professional fees can be a significant expense for small businesses, but the good news is that they are tax deductible. They are costs related to hiring legal and professional services necessary to running your business.

These include fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping and tax-related services provided by doola.

However, if the fees are for personal work like hiring a lawyer to make a will, you can only deduct the part of the fee that’s related to the business.

One way to maximize these deductions is by prepaying any anticipated legal or professional fees before the end of the year. This means paying for services that will be provided in the upcoming year before December 31st of the current year. 

By doing this, you can claim a deduction in the current tax year instead of waiting until next year when you file your taxes.

However, there may be limitations on how much you can prepay and which expenses are eligible for this deduction. 

Interests

As most small business owners, you must also have taken out loans or used business credit cards to fund your operations and keep your business running smoothly.

What you may not realize is that the interest paid on these loans and credit cards can be deducted from your taxes, reducing your overall tax liability.

You can deduct the interest paid to your lender or credit card company if you are:

• Legally liable for the debt. For example, if you use a vehicle for both personal and business purposes, you can deduct the percentage of interest paid on car loans in proportion to its usage for work-related activities.

• You and the lender have a true debtor/creditor relationship. The IRS tends to reject deductions for loans between related parties, such as family members.

When paying off loans or credit card balances, separate personal and business expenses. This means using different accounts or payment methods for each category so that there is no overlap between personal and business expenses.

This will not only make calculating deductions easier come tax time, but it will also ensure accuracy in reporting if the IRS audits you.

Home office expenses

You can deduct a portion of your housing expenses against business income if you use a portion of your home as an office.

You can deduct $5 per square foot of the area in your home that is used for business, up to a maximum of 300 square feet.

You can also claim deductions for expenses related to home maintenance, such as mortgage interest or rent, utilities, real estate taxes, landscaping service, and repairs.

Multiply these expenses by the percentage of your home devoted to business use.

To qualify for the home office deduction, you must regularly use your home office exclusively for conducting business activities. A desk that doubles as your kitchen table won’t work. Plus, your home office must be your principal place of business.

Remember to keep photos of your home office workspace with your tax documentation as evidence in case the IRS selects your return for audit.

Secure Your Bottom Line with doola’s Services

In a small business, every penny counts, which is why you cannot afford to miss out on these potential savings. And doola is here to ensure that you are keeping most of your revenue by utilizing all the tax deductions available to you.

Filing taxes and claiming deductions involve numerous forms and paperwork; however, with our expertise in handling these tasks efficiently on your behalf, you can focus on running other aspects of your business.

Consult our team of tax experts and bookkeepers to ensure that your small business takes full advantage of all eligible deductions, ultimately helping you save money and increase profitability.

By utilizing doola’s services, you can rest assured that you are keeping most of your revenue in tax deductions and not overpaying on taxes. 

From home office to meal marketing expenses, we leave no stone unturned in finding ways to reduce your taxable income.