Top Tax Deductions Every Small Business Should Know About

Many small business owners don’t realize they have several opportunities available to them to reduce their tax bills, such as deductions offered by the IRS to sole proprietors, partnerships, LLCs and S corporations.

Tax deductions can range from simple office supplies like paper and pens, to those associated with purchasing new computers or software subscriptions. Here are the top tax breaks every small business owner should know about.

1. Home Office Deduction

Home office deductions provide valuable tax breaks to self-employed individuals, independent contractors and freelancers. It allows them to deduct expenses such as a desk, computer and supplies directly from federal income tax returns while also deducting part of mortgage interest and utilities related to their business activity.

In order for your home office to qualify, it must be exclusively used and regularly in relation to your trade or business. Furthermore, it should serve as your principal place of work where you conduct administrative or management activities and meet with clients. Your office may take the form of a room, separate free-standing structure such as a shed or garage or part of your house like dining room, kitchen or den.

There are two ways to claim your home office deduction: through actual expenses or using a simplified method that equates the office share of home expenses with its percentage share up to 300 square feet of office space taken up.

2. Business Travel Deduction

If you travel for business purposes, some expenses associated with that trip could be tax-deductible. Just make sure the purpose is truly business related.

The IRS defines business travel expenses as “ordinary and necessary.” That means your airfare, train or car cost must directly relate to business activities; lodging expenses such as hotel or Airbnb bookings; meals eaten during meetings or networking events also qualify as tax deductions.

Other expenses related to Wi-Fi, hotspot or international phone calls may also be tax deductible; just remember to keep receipts or use an expense tracker digitally to document these costs and save both time and stress during tax season – plus it provides documentation in case of an audit!

3. Business Insurance Deduction

As a small business owner, it’s essential that your enterprise be safeguarded from potential financial risks; insurance is an ideal way to do this. Depending on its type, insurance can cover either property damage or liability claims against your firm.

As a self-employed individual, you can deduct the cost of health insurance for yourself and your family if applicable. The IRS allows this deduction for sole proprietors, partners in partnerships, LLC members and owners with more than 2% ownership in an S corporation.

Additional tax deductions available to small businesses for taxes filed include home office deduction, startup costs deduction of up to $5,000 and Section 179 deduction. It’s wise to seek professional advice regarding these deductions as their calculations can often change and miscalculation can lead to costly audits.

4. Business Credit Card Deduction

Credit card fees are eligible as business expenses, including annual and transfer fees as well as merchant services provider charges.

Small businesses and freelancers should use separate cards for personal and business expenses to easily track deductible fees. A spreadsheet or record keeping system may also prove invaluable in having accurate data at tax time.

Deducting credit card fees is an essential way for small businesses to maximize their tax deductions, but it’s important to remember that not all fees qualify and that only those directly related to business activities should be claimed as tax deductions.

5. Business Interest Deduction

Business loans and debt financing are an integral part of running most businesses, which makes the tax deduction for interest such an important benefit. Unfortunately, however, the recent change to IRC SS 163(j) deduction limits under IRC has presented many small business owners with headaches; Bloomberg Tax’s Alex Bayrak provides all the details on this new limit in this episode, such as its relation to CARES Act requirements and how it differs from depreciation/amortization restrictions.

Keep track of all the deductions your small business is eligible for to save thousands on taxes. Therefore, it’s vitally important that personal and business expenses are kept distinct. Use solid bookkeeping practices when keeping records. Stay informed on new tax deductions by subscribing to our e-newsletter designed specifically for small business owners.