Small Business Tax Deductions: A Detailed Guide To These Write-Offs

For many small business owners, filing business taxes means keeping proper records and staying compliant. But done wisely, tax filing also offers strategic opportunities. 

Making the most of small business tax deductions can help you lower your tax liability and maximize your profits. First, you must understand how these deductions work. 

Small Business Tax Deductions: The Basics

Small business tax deductions are expenses, losses and payments you can subtract from your gross business income. These write-offs reduce your company’s taxable income, which lowers your tax burden.

Mastering tax write-offs is vital for small business profitability. Lowering your company’s taxable income reduces your tax liability. Put simply, it’s easier to pay taxes on $3M than on $4M. That difference can go straight to your bottom line, leaving more money available for regular operations, new business opportunities and increased profits.

The IRS publishes a Tax Guide for Small Business, which contains an overview of all small business tax deductions. Let’s look at some primary ways to lower your taxable income. 

Common Deductible Expenses 

You can deduct many of the costs of operating your business from your taxable income. The IRS states that deductible business expenses must be both ordinary and necessary, meaning that the expense is at once “common and accepted” in your field of business and “helpful and appropriate” for your business.

Here are some of the most common deductible expenses:

• Rent: You can deduct the rent you pay for business property from your taxable income. This includes business-use property such as office space or warehouse use. You can also deduct utility fees.
• Employees’ pay: You can deduct reasonable compensation for services performed for your business. Employees’ pay includes bonuses, sick pay and vacation pay. You can also deduct the cost of contract labor to fill temporary staffing needs. However, as an owner, you cannot deduct your own salary, or any withdrawals you make from the business. 
• Legal and professional fees: You can deduct legal and professional fees paid for expenses incurred in ordinary business operations. Fees for regular accounting fees, for instance, fall into this category. You cannot typically deduct legal fees paid to acquire business assets.
• Insurance costs: You can deduct premiums paid for many kinds of business insurance including fire and flood insurance, group medical insurance for employees, liability or malpractice insurance, workers’ compensation and more. 
• Interest: You can deduct the interest accrued on business-related debt. The IRS places some limitations on who can deduct interest fees and how much they can deduct. When in doubt, it’s best to get expert tax advice.
• Marketing and advertising: You can deduct the full cost of promotional campaigns to generate or retain customers, whether you advertise online, in print publications, on TV or by sponsoring events. 
• Pension plan contributions: You can deduct your company’s contributions to qualified employee pension plans, such as SEP, SIMPLE or Keogh plans. 
• Taxes: If you file Schedule C, you can deduct federal, state, municipal and foreign taxes directly attributable to your business operations. You can also deduct the sales tax you pay on other business-related expenses.
• Travel costs: You can deduct many of the expenses incurred when traveling for business, including transportation fees, lodging, meals and more. You can also deduct the travel reimbursements you pay to employees. 

According to the IRS, the following expenses are generally not deductible, even when paid by the business:

• Charitable contributions
• Club dues or fees 
• Demolition costs or losses
• Entertainment expenses
• Political contributions

While this list includes some standard tax deductions for business owners, the Tax Guide for Small Business contains the complete list. It’s a dense document and the entire process is complex, especially in the case of depreciation. A skilled tax professional can answer your questions about which tax deductions are most appropriate for your business and how and when to apply them. 

Asset and Depreciation Deductions

Purchasing a tangible asset like a building, equipment or software leads to costs for your business. Modern accounting practices spread these costs over the asset’s lifetime. If a piece of manufacturing equipment has a useful life of 10 years, for instance, in accounting terms, the cost is spread over the full 10 years. That’s depreciation. 

Section 179 of the U.S. Tax Code allows business owners to deduct some—or all—of the cost of such assets in the year they are purchased or put into service. As such, rather than deducting a portion of the cost of the above manufacturing equipment each year for 10 years, your business can deduct the full amount the year it was purchased. This strategy immediately lowers your taxable income by a significant amount.

The goal of section 179 is to stimulate the economy by encouraging business owners to invest in their businesses. It makes sense: if you can write off equipment purchases and immediately see a tax benefit, you’re much more likely to make important purchasing decisions now rather than putting them off until a later date. 

Asset Deduction in Action

Consider this example: Your company is on track to make $2M of taxable income while also needing a $500K software upgrade. Purchasing the software now means you can write off the full $500K, lowering your tax liability to $1.5M. Maximizing your asset write-offs in this manner lets you put more money back into your business. At tax time, your business will be stronger both financially and operationally.

Notably, you cannot use Section 179 to give your company a loss. If instead of $2M, your company made only $400K in taxable income, you could write off only $400K of that $500K software purchase. The IRS also limits how much you can deduct under section 179 each year. In 2024, the maximum deduction is $1.22M. There are additional limitations for special depreciation allowances and for sport utility vehicles. But there’s also more detail to come about vehicle deductions in general. 

Writing Off Vehicle Expenses

If you use a car or truck in your business, you may deduct many of the expenses related to the use of your vehicle for business purposes, even if you lease your vehicle rather than own it. If that vehicle is used solely for business purposes, you can deduct all the expenses related to ownership and operation. 

Standard Mileage vs. Actual Expense

If you use your vehicle for both personal and business reasons, there are two main methods to calculate vehicle expenses: the standard mileage rate and the actual expense method. 

• The standard mileage rate is the easier of the two methods to calculate. The standard mileage rate—a fixed amount per mile driven for business purposes—is set every year by the IRS. In 2024, the rate is 67 cents per mile. For example, if you drive 1,000 miles for business, you can write off 1,000 x 67 cents as a vehicle-related business expense ($670). This rate is all-inclusive, so you cannot make other deductions, such as for gas or maintenance. Nor can you use this method if you operate five or more vehicles at a time—special rules apply for auto fleets.
• The actual expense method requires you to track all vehicle-related expenses such as gas, insurance and maintenance for the full year, along with your business-related mileage. To calculate your expense deduction, multiply the total expenses by the percentage of business-related mileage. If you use the vehicle only for business purposes, you can claim 100% of the expenses.

If you wish to use the standard mileage rate, you must do so in the first year the car is used for your business. After that, you can choose the standard mileage rate or actual expense method on a year-by-year basis. In both cases, parking and toll expenses are deducted separately.

Good Record Keeping Goes a Long Way

Keeping track of vehicle-related expenses is mandatory for both methods, as well as good business practice. Maintain detailed records of all costs for cleaning, fuel, maintenance and so on as they occur. Diligently track all miles driven for business purposes—you can find many helpful tracking tools online. These comprehensive records will be useful at tax time and will help you determine which method will generate the largest deduction for your business. 

Home Office Expenses

If you run your small business out of your home, you can claim a percentage of many home-related expenses as a business deduction. You can claim these deductions whether you rent or own, regardless of the type of dwelling you live in, whether it’s a detached house, apartment or mobile home.

The IRS lays out two main criteria for claiming home office expenses as a small business tax write-off. First, you must reserve a portion of your home exclusively and regularly for business. Second, your home must be your primary place of business. 

Simplified vs. Regular Method

As with vehicle expenses, there are two methods to calculate your home office deductions: the simplified method and the regular method.

• The simplified method allows you to deduct a straightforward $5 per square foot of your home used exclusively for business purposes. For instance, if you have a 1,000 square foot home, of which 250 square feet is your business office, you can claim $5 x 250, or $1,250, as a small business tax deduction. With this method, you cannot claim more than 300 square feet, or $1,500. The simplified method does not include depreciation.
• The regular method is more complex but allows you to deduct more home-related business expenses. You must track all home-related expenses, including depreciation, insurance, maintenance, rent, mortgage interest, repairs and utilities. With this method, your deduction is allocated as a percentage of the total home expenses, depending on the square footage of your exclusive business space. For example, let’s assume you have a 1,600 square foot home, with an exclusive business office of 400 square feet. If your total home expenses were $10,000, you can claim $2,500 as a home office deduction.

Depending on the size and square footage of your home office and the type and amount of your expenses, you can choose whichever method will give you the largest deduction. However, you must use the same method for the entirety of each taxable year. And you must keep accurate records that document all your home office expenses.

Accurate Records Are Key

Meticulously maintained records are vital for your business at tax time. Accurate records make tax preparation faster and easier, and comprehensive documentation lets you quickly compare which deduction methods will provide the largest deductions. 

Track all your expenses as you go, and keep all purchase receipts, invoices and payment receipts for reference. There are many online tools to help with this process, or you can access the skilled help of experienced tax professionals to help you prepare for tax season. In addition to improving tax transparency and compliance, these tax experts can advise you on forward-thinking tax strategies, giving you the means and methods to take advantage of bonus depreciation opportunities and maximize capital asset write-offs. 

Make Your Deductions Count

In addition to lowering your tax liability, properly leveraging tax write-offs and deductions can help you make much-needed investments into your business, improve your cash flow and strategically position your company for future opportunities. If you need experienced tax deduction and planning advice tailored to your business needs, Paro can help. 

With Paro, you can connect with experienced tax professionals who can help you maximize your small business tax deductions. These experts can set up advanced reporting functions, analyze your financial data to recommend the best business deductions and even help you get a business tax extension. You’ll be fully prepared to calculate and pay your taxes, and you’ll also have a clear understanding of your company’s financial health so you can make the most sound and strategic decisions going forward.