What business expenses can you write off for your small business?
Small business owners can write off a number of expenses as tax deductions to lower their tax amount. However, many entrepreneurs are simply unaware of all the expenses they can write off and therefore haven’t taken the effort to track and itemize them.
Let’s get into understanding what business expenses you may have overlooked in calculating your taxes and how you can use applicable tax deductions to your advantage.
What Are Allowable Business Expenses?
As a business owner, we’re sure there’s nothing worse than having a profitable year but then getting hammered come tax time.
Been in that situation? We don’t want you to ever be in that scenario again. You should be able to keep or reinvest most of your hard-earned money.
So, here’s a quick list of the major business expense categories that can be written off for LLCs, sole proprietorships and corporations.
- Office space
- Office expenses
- Retirement plans
- Professional services
- Bank interest and fees
- Marketing and advertising
- Employee wages and benefits
- Child and dependent care
Let's further break down each category.
Whether you are working out of your house or coworking space or renting an office space, any expenses related to the workspace can qualify as a tax deduction.
If you have a home-based business, the amount you can write off is directed tied to the amount of space in your home that is solely and exclusively dedicated to your business (so if you sometimes respond to emails from your dining table and try to write that off, it won’t fly).
Also, to qualify for a home office tax deduction, you shouldn’t have any other workspace — no coworking place or office that you frequent. Any portion of utilities (water, heat and electricity) related to your home office space can also be written off.
Use the IRS's home office deduction sheet to understand home office eligibility requirements and how much you can actually write off for your LLC.
Smart Tax Filing Tip
The IRS really scrutinizes home office space expenses, so we recommend taking a picture of your home workspace and keeping a record of your average time spent working there.
If you are renting or have bought a space and are paying for associated utilities, then you can deduct this amount for tax purposes.
A property owned by a business is counted as a capital asset.
What Are Capital Assets?
Capital assets are substantial pieces of property owned by a business that are not intended to be sold as part of the regular course of business and are intended to help generate revenue for the business over the course of a useful life longer than a year. It's helpful to think of capital assets as "major purchases" or investments.
So, the swanky new office space you've bought is a capital asset. Some other examples of capital assets fall under the larger expenses categories of office supplies and travel.
Office Expenses and Supplies
Broadband connection, printer, paper and pens can be written off under office supply expenses. Be sure to keep all receipts for documentation purposes.
Any software purchases or website expenses required to run your business, like bookkeeping software or website hosting fees, can also be used to lower your taxable amount under “Other Common Business Expenses → Other Miscellaneous Expenses” of your Schedule C tax form.
Smart Tax Filing Tip
For phone and internet expenses, only the percentage that is dedicated to business use can be deducted.
For example, if you use your phone for business and personal reasons, then only 50% of the expenses can qualify for an exemption.
What qualifies as office expenses and supplies?
- Pens, paper, notebook, folders, computer ink
- Internet and telephone bills
- Stamps, shipping labels, freight and postage fees for business-related items
- Envelopes and packaging materials are included in office supplies
- Website-related expenses (domain name, hosting, website builder fees)
- Capital purchases for business (storage unit, computer, machinery)
|Smart Tax Filing Tip
When it comes to capital assets like equipment or machinery, the IRS has rules as to whether you can write off 100 percent of the expense immediately or deduct its value over a few years.
A tax consultant can help evaluate what's the best option for you.
If you’re a business owner who’s frequently on the go — using your car to deliver products or traveling to meet a client, then you should look into what travel expenses you can write off.
If you have a car dedicated to business (which qualifies as a capital asset), you can deduct all expenses for its maintenance and operation (fuel, oil servicing, insurance, tire replacement). However, if you’re using your personal car for business trips, then only the percentage of time the vehicle is used for business is qualifiable. For example, if your annual spend on car operating expenses was $3,000 but used your car for business only 5 percent of the time, then your deduction would only be $150.
Other expenses that fall under this category include airline fares, accommodation, tolls and meals during the business trip.
For information on calculating mileage reductions, refer to IRS Standard Mileage Rates.
Saving towards your retirement? You can deduct the contributions made to the plan to adjust your taxable income.
Retirement plans for small businesses are:
- SEP (simplified employee pension) plans
- SIMPLE (savings incentive match plan for employees) plans
- Qualified plans (also known as H.R.10 plans or Keogh plans when covering self-employed individuals), including 401(k) plans
Your business, even if it’s a retail store, will have some form of insurance. You’ll be happy to know these qualify as deductible expenses.
Some of the common business insurances that can get you a tax break include:
- General Liability Insurance
- Public Liability Insurance
- Professional Insurance
- Malpractice Insurance
- Worker’s Compensation
- Theft, Fire Insurance
Also, if you’re self-employed, you can write off 100 percent of the expenses related to the health insurance of:
- Your spouse
- Your children under the age of 27 at the end of the fiscal year
If, during the course of the fiscal year, you used the help of professional services like a tax consultant, bookkeeper or lawyer to keep the business going, the associated fees are tax deductible.
If you have trouble determining which professional service fees qualify for this exemption, these IRS guidelines for legal and professional fees can help.
Bank Interest and Fees
Have a business credit card? Or a small business loan? Any interest paid on your loan or credit card can be written off.
Bank fees, such as monthly maintenance or overdraft fees, also count under this category.
|Smart Tax Filing Tip
For credit cards, only interest paid on business-specific expenses is deductible. It's best to have a separate business credit card.
Marketing and Advertising
Are Google Ads or sponsored Instagram posts a major part of your marketing strategy? You’ll be happy to know that you can write off any expenses related to advertising and promoting your business.
- Online and print ads
- Design and copywriting fees
- Social media campaigns
- Logo design
- Business cards
Softwares subscription fees used for automated marketing like MailChimp or HubSpot also fall under this category.
Signed up for a course to upskill yourself or subscribe to a trade magazine? These too qualify as allowable business expenses you can claim for your small business.
Books, seminars and industry-related conferences all fall under deductible expenses.
Employee or Contract Labor Wages
If your small business has any employees (not a partner or LLC member), you can deduct 100 percent of their wages. This deduction includes bonuses and commissions.
You can also deduct a certain amount you spend towards employee benefit programs like a qualified retirement plan, education assistance or life insurance.
Gifts for employees are 100 percent deductible up to $25 a year/per employee.
If you hire any contractors (graphic designer for your logo), you can also deduct their expenses.
Dependents and Childcare
If you're putting your kid in daycare so you can run your business peacefully at home, you could include that as a business expense for tax purposes.
Adult dependent care expenses for a spouse or family member who is unable to look after themselves due to a disability are also applicable under this deduction.
Manage Your Expenses, Grow Your Business
It’s simple — by writing off business expenses for your LLC or sole proprietorship, you are lowering your taxable income and saving your business potentially hundreds of dollars! The more expenses you are able to write off, the more you’d eventually be able to reinvest into your business.
Also, there’s nothing sweeter than getting a refund from the IRS. Keep our list of business expenses that are tax-deductible handy, as it’s easy to overlook many of them. This way, you’ll be able to save more money and grow your business.
Need a bit more assistance with getting your taxes in place? Why not offload the numbers to Incfile’s Tax & Bookkeeping Services? We have worked with over 1,000,000 small businesses and helped them not only keep the books tidy but also make tax season a breeze.