Small business loans

Take your next step with fast, affordable business financing.

Apply Now
Invest

Learn how you can invest in American small business.

Resources

Get inspired, read advice, and learn how to help your business thrive.

About us

Find out how we’re building a better financial world.

Resources >   Growth and Operations  >  Operations  >  

24 Small Business Tax Deductions: A Comprehensive Checklist

Operations

24 Small Business Tax Deductions: A Comprehensive Checklist

24 Small Business Tax Deductions: A Comprehensive Checklist

Updated: Nov 20, 2019

Everyone’s favorite day of the year is right around the corner: Tax Day 2017 is Tuesday April 18. To help you minimize your tax liability, here is a list of 20+ small business tax deductions.

Advertising

On line 9 of Form 1040, Schedule C, you can fully deduct reasonable advertising expenses that are directly related to your business activities, such as gearing up for Small Business Saturday. Regardless of the medium (TV, radio, online, mail-in), keep all receipts of promotional campaigns for your business.

Bad Business Debt

Bad news: you can’t recover the last 10% on a sale made on credit to a client. Good news: you can now deduct that amount as a business bad debt. This is why it’s a good idea to keep track of your accounts receivable throughout the year. For more information on reporting business bad debts, consult Chapter 10 from Publication 535.

Business Miles Driven

It pays off to keep track of how far you drive for business purposes. In 2017, you can deduct 53.5 cents per business mile driven, down from 54 cents in 2016. Most owners of small businesses can deduct business miles driven on Form 1040, Schedule C or Form 1040, Schedule C-EZ

Business Use of Car

If you use your car in your business and you use it only for that purpose, you may deduct its entire cost of operation, including insurance and maintenance costs, up to the applicable limit. However, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. For more details, consult Topic 510 from the IRS.

Business Use of Home

Bootstrapping operations making use of home space for business purposes may be able to deduct eligible home expenses, such as mortgage interest, depreciation, insurance, utilities, and repairs. One best practice for filers of Form 1040, Schedule C is to use the area used regularly for business as a percentage of the total area of home to allocate allowable deductions on Form 8829. Consult Publication 587 for more details.

Capital Expenses

Certain business expenses, such as business start-up costs, business assets, and business improvements, have to be capitalized instead of deducted. You also have the option of amortizing or deducting certain business start-up costs. To learn more about costs that you can deduct, capitalize, or amortize, refer to Chapters 7 and 8 from Publication 535.

Contract Labor

Depending on the nature of your business, you may hire employees full-time or part-time or use independent contractors. When hiring the latter, make sure to issue Form 1099-MISC to any such contractor to whom you pay at least $600 in 2017. Regardless of whether or not you have to issue a 1099-MISC, you can deduct all payments for contract labor as business expenses.

Cost of Goods Sold (COGS)

If your small business manufactures products or purchases them for resale, you have the option of including eligible expenses, such as costs of raw materials, storage expenses, and direct labor costs, in COGS. No double dipping: all expenses included in your COGS become ineligible for deduction again as business expenses.

Part III of Form 1040, Schedule C has a worksheet to help you determine your COGS for the year and deduct your taxable income. For more information on COGS, refer to Publication 334 and for more information on inventories, refer to Publication 538.

Credit for Small Employer Pension Plan Startup Costs

Eligible small business owners can use Form 8881 to claim a credit of up to $500 for qualified startup costs incurred in establishing or administering an eligible employer-sponsored retirement saving plan, such as a traditional or Roth 401(k). The IRS allows you to include setup and administration costs and expenses to educate your employees about the plan.

Bonus: you can claim this credit for each of the first three years of the plan, and may carry it back to other tax years if you can’t use it in the current year. Here is our full guide on setting up a small business retirement plan.

Depreciation

Generally, you’ll have the option to fully deduct the entire cost of business assets, such as heavy machinery, office furniture, and vehicles, in the year of the purchase or deduct a portion of the expense over a certain number of years. The IRS Section 179 Deduction allows small and medium-sized businesses to purchase up to $500,000 in business-related equipment and write off the full cost of the expense that year.

Whether you decide to take advantage of Section 179 or deduct depreciation over a period of time, you’ll need to file Form 4562.

Employer Contributions to Employee’s Retirement Accounts

Sole proprietors deduct employer contributions on Schedule C (Form 1040) or Schedule F (Form 1040), owners of partnerships deduct them on Form 1065, and owners of corporations deduct them on Form 1120 or Form 1120S.

This can be a major deduction.  For example, in 2017 some small business owners could deduct in employer contributions up to 25% of the compensa­tion paid (or accrued) during the year to el­igible employees participating in the plan. To find out up to how much you can deduct from your employer contributions to retirement accounts, consult Publication 560.

Financial Institution Fees

Any charges that you pay to financial institutions that are directly related to the operation of your business are deductible as business expenses. Some examples include overdraft fees from your business checking account, Paypal charges for an incoming client payment, and convenience fees from a credit card issuer.

Health Insurance Premiums

Self-employed individuals and sole proprietors paying for their own health insurance can deduct their insurance premiums for medical, dental, and qualifying long-term care for themselves, their spouses, and their dependents. You would claim the deduction for your total premiums on line 29 of page 1 from Form 1040. Keep a copy of Form 1095-B from your insurance provider to substantiate your claim and avoid a penalty for lacking minimum qualifying health insurance coverage.

If you have a part-time job to supplement your income, remember that you can only claim the health insurance premium deduction for months when you were (or your spouse, if applicable) not eligible to participate in any employer-provided health plan.

Interest on Business Loans

Regardless of whether they’re charges from a term loan, line of credit, or working capital account, any interest paid on money that you borrowed for business activities is tax deductible.

Internet-Related Expenses

You can deduct Internet­-related expenses, including domain registration fees and webmaster con­sulting costs.

Interview Expense Allowance

Finding the right candidates costs you not only time but also money. To attract top talent, you may offer your job candidates a reimbursement of transpor­tation or other expenses related to interviews for possible employment. The IRS allows you to fully deduct most of those reimbursements as business ex­penses (only 50% of reimbursements for food, bever­ages, and entertainment).

Legal and Professional Fees

A DIY attitude is a great attribute for any small business owner. However, there are time that it pays off to hire a pro, such as filing complex taxes or drafting an employer agreement. Charges by accountants, attorneys, and other professionals that are ordinary and necessary expenses directly related to op­erating your business can be deducted as business expenses.

Attention sole proprietors: A tax preparation fee from a CFA to prepare your tax return relating to your business as a sole pro­prietor is deductible on Form 1040, Schedule C or Form 1040, Schedule C­EZ.

Licenses and Regulatory Fees

Depending on your trade or industry, you may have to pay licenses and regulatory fees to state or local governments on an ongoing basis. For example, an architect or engineer may have to pay a license fee to a state government every two years. Such license and regulatory fees directly related to your business activity are deductible on your return.

Rent

Payments for the use of property, such as office space or warehouse, that you don’t own are tax deductible as business expenses. If you have or will receive equity in or the title to the property, the rent isn’t deductible.

Rental Income Activities

If you rent out a portion of your space to other small business owners, freelancers, or independent contractors, you could potentially deduct many activities directly related to that activity. Some examples include transportation expenses to collect rent or maintain property, prepaid insurance premiums, and expenses to conserve property from the time it was made available for rent. Consult Publication 527 for a list of eligible expenses and guidelines for claiming these type of deductions.

Subscriptions to Trade or Professional Publications

Let’s say that in you’re in the procurement business and that you pay an annual subscription fee to the Journal of Strategic Contracting and Negotiation, which starts at $226 per year for print only access. You can definitely deduct that subscription as a business expense.

Taxes

On your Schedule C or C-EZ, you can deduct various federal, state, local, and foreign taxes directly attributable to your business. For example, you can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out to your employees. Just remember that you may have some reporting duties for certain taxes, such as filing form W-2 for your employees.

However, there are other taxes that small business owners overlook throughout the year. Imagine that you had to pay $30 for the annual state license tags of your business vehicle, $40 for a required sticker from the city government for your storefront, and $150 for city personal property tax on the business vehicle. That’s an extra $220 available for deduction as a business expense.

Travel Expenses

While local commuting costs to your business aren’t necessarily tax deductible, eligible business travel expenses from you and your employees are tax deductible. Since this is a deduction that the IRS often takes a closer look at, follow the guidelines from Publication 463 to cross your t’ and dot you i’s in case of an audit.

Wages

There are several financial and tax considerations for hiring your first employees. One of them should be that you can deduct your employee’s pay for services performed. Additionally, you  may be able to deduct eligible bonuses, education expenses, fringe benefits, and expenses for meals and lodging as business expenses. Read Chapter 2 from Publication 535 as an introduction and refer to Publications 1515-A, and 15-B for more detailed guidelines.

Tags: Operations

Take your business further.

Keep Reading

Great Review:

5779 REVIEWS