Tax Deductions Every Small Business Owner Should Know About
As a small business owner, maximizing your tax deductions may have a significant impact on your bottom line and save you from having to pay Uncle Sam. With so many potential write-offs available, knowing which ones apply to your business can save you thousands of dollars when tax season comes around. However, navigating the world of tax deductions can feel overwhelming without a clear guide.
We’ll cover essential tax deductions every small business owner should know about, from home office expenses to equipment purchases, and provide tips on how to maximize your savings. As a side note- not all write-offs work for every business. Remember that it needs to be necessary and ordinary to your business. For example, I new excavator may be a write off for a construction company but not for my bookkeeping firm.
1. Home Office Deduction
If you operate your business from a dedicated home office, you may be eligible for the home office deduction. The IRS allows you to deduct a portion of your home expenses, such as mortgage interest, rent, utilities, and insurance, based on the percentage of your home used exclusively for business purposes.
There are two ways to calculate this deduction:
Simplified Method: Deduct $5 per square foot of your home office space, up to a maximum of 300 square feet, for a total deduction of up to $1,500.
Actual Expense Method: Calculate the exact percentage of your home used for business and deduct a portion of your actual home expenses (e.g., mortgage interest, utilities, insurance).
Tip: To qualify, the home office must be used regularly and exclusively for your business. Make sure to keep records of all home-related expenses and measurements of your office space. Technically having your Peloton in your office is a no no!
2. Vehicle and Mileage Deduction
If you use your personal vehicle for business purposes, you can deduct the expenses associated with its use. There are two methods for calculating this deduction:
Standard Mileage Rate: In 2024, the IRS allows you to deduct 65.5 cents per mile driven for business. To maximize this deduction, keep detailed records of your business mileage, including the date, purpose, and number of miles driven for each trip.
Actual Expense Method: You can also deduct a portion of your actual vehicle expenses, such as gas, maintenance, insurance, and depreciation, based on the percentage of miles driven for business versus personal use.
Tip: If you use your vehicle exclusively for business, you can deduct 100% of the expenses. Just be sure to maintain accurate mileage logs and receipts.
3. Business Meals
Business-related meals are 50% deductible as long as they are directly related to your business. This includes meals with clients, prospects, or business partners where business is discussed. If you’re traveling for work, meals are also eligible for the deduction.
When deducting meals, you’ll need to keep detailed records, including the date, location, participants, and purpose of the meal, along with receipts.
Tip: Take advantage of meal deductions when networking with clients or attending business events, but always keep a clear business purpose in mind to avoid IRS scrutiny.
4. Equipment and Office Supplies
Small business owners can deduct the cost of equipment and office supplies purchased for business use. This includes:
Computers, printers, and software
Office furniture such as desks and chairs
Everyday office supplies like paper, pens, and postage
For larger purchases, such as equipment that will be used for more than one year, you may be able to take advantage of Section 179. This tax provision allows you to deduct the full cost of qualifying equipment in the year it’s purchased, rather than depreciating it over time.
Tip: Keep receipts and documentation for all business purchases. If you’re unsure whether an item qualifies, consider consulting a tax professional.
5. Business Travel Expenses
If you travel for business, many of your travel-related expenses are deductible. These include:
Airfare, train tickets, and car rentals
Hotel accommodations
Meals (subject to the 50% deduction limit)
Transportation costs such as taxis or rideshares
Business trips must be primarily for business purposes. While you can mix business and leisure, the majority of your trip must be work-related in order to deduct your expenses.
Tip: Save all receipts and keep detailed records of your trip itinerary, including the business activities you participated in. The more documentation you have, the better your chances of defending your deductions in the event of an audit.
6. Health Insurance Premiums
If you’re self-employed and pay for your own health insurance, you may be able to deduct your health insurance premiums as an above-the-line deduction. This means you can take this deduction even if you don’t itemize your deductions on your tax return.
This deduction applies to medical, dental, and long-term care insurance premiums for you, your spouse, and your dependents.
Tip: This deduction only applies if you’re not eligible for a health plan through another employer, such as your spouse’s job. Be sure to keep records of all premium payments.
7. Rent and Utilities
If you rent office space or other business-related property, the cost of rent is fully deductible. Additionally, you can deduct utility expenses, such as electricity, water, internet, and phone services, as long as they are directly related to your business operations.
Tip: If you work from a home office, you can include a portion of your utilities in your home office deduction, but be careful not to double-dip when claiming deductions.
8. Startup Costs
When starting a new business, the IRS allows you to deduct up to $5,000 in startup costs in your first year of operation. Startup costs can include:
Legal fees for incorporating your business
Costs of market research and business planning
Advertising and promotional expenses before your business opens
Any costs over the $5,000 limit must be amortized over 15 years.
Tip: Keep track of all expenses incurred before your business officially begins operating. These can add up quickly, and the startup deduction is an easy way to recoup some of those initial investments.
9. Retirement Contributions
Contributing to a retirement plan, such as a SEP IRA, SIMPLE IRA, or solo 401(k), is a great way to reduce your taxable income while saving for the future. For 2024, the contribution limits for SEP IRAs are the lesser of 25% of your compensation or $66,000, while solo 401(k) contributions max out at $23,000.
Tip: If you’re self-employed, making retirement contributions can provide significant tax savings. Consider working with a financial advisor to determine the best retirement plan for your business.
10. Professional Services
Any fees you pay for professional services are deductible. This includes:
Legal fees
Accounting or bookkeeping services *INSERT HARPER AND FAYE*
Marketing consultants
These expenses are considered ordinary and necessary for running your business and are fully deductible.
Tip: Keep detailed records of invoices and payments made to professionals, as these expenses can add up quickly, especially if you regularly outsource services like bookkeeping or marketing.
Maximize Your Tax Savings with Expert Help
While this list covers some of the most common tax deductions for small business owners, there are many other opportunities for savings depending on your specific industry and business operations. The key to maximizing your deductions is staying organized, keeping accurate records, and consulting with a tax professional who understands the nuances of small business tax law.
At Harper and Faye Financial Services, we specialize in helping small business owners like you navigate the complexities of tax deductions. Our team can ensure your books are accurate, your deductions are maximized, and you’re prepared for tax season. Contact us today to learn how we can help you keep more of what you earn!
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