Small Business Tax Deductions Guide
Common Business Expenses You Can Deduct
Some business tax deductions are more complicated than others, and some deductions must be taken with caution, because they can be misused or result in an audit "red flag."
In some cases, expenses might need to be amortized or depreciated (deducted over a period of several years) if they are startup costs, or if they are related to the purchase of business equipment.
Here is a list of common business tax expenses that you can deduct, including deductions that were brought about by the 2017 Tax Cuts and Jobs Act (TCJA), and have been in effect since the 2018 business tax year.
All expenses must be "ordinary and necessary" to the operation of your business. They cannot be for personal expenses, which must be separated out and paid from your personal accounts.
(New) Qualified Business Income Deduction
The TCJA added a new tax deduction for business owners, called the Qualified Business Income Deduction (sometimes called a Section 199A deduction). This allows for an additional deduction of up to 20% of qualified business income, on top of normal business deductions.
The deduction is only for business owners who pay taxes through their personal tax returns, not for corporate shareholders.
Accounting and Legal Fees
You can deduct fees paid to an attorney, CPA, architect, or other professionals for services rendered as part of your business.
This includes the cost of having a tax professional prepare your business tax return. For sole proprietors and single-member LLC owners, you can deduct the cost of preparing your Schedule C, but you can't take a business deduction for the cost of preparing the rest of your tax return, because that's a personal expense.
You can't deduct tax, legal, accounting, or other professional fees or expenses as part of business startup expenses or to acquire business assets. These may be depreciated or amortized.
You can deduct costs for advertising, publicity, and other marketing activities that are directly related to your business. This includes the cost of meals and entertainment at public events for advertising purposes, such as goodwill advertising to keep your brand name before the public, and public service advertising (like promoting contributions to a local food pantry).
You can't deduct advertising costs that are related to starting a business, but those may be depreciated or amortized over time.
The IRS specifically says you also can't deduct advertising on your personal vehicle.
Books, Professional Journals, and Software
You can deduct costs for business reference books, professional journals, and business-necessary software. These costs are deductible under the miscellaneous expenses category.
Car and Truck Expenses
Deducing expenses for business use of a vehicle is complicated. You can deduct the cost of driving for business purposes, but you must keep good records.
Two options are available for costs of business driving are a standard IRS mileage rate that changes yearly, or actual expenses.
Commissions Paid to Employees and Non-Employees
You can deduct commissions paid to employees and to outside contractors or others, including insurance agents and real estate agents who provide services to your business. These expenses are usually deductible to you and taxable to the person receiving them.
This article on commissions describes the detail of deducting these expenses and how to include payments on the recipient's tax return.
Dues for Clubs and Organizations
Your business can deduct dues for clubs and organizations, but not for social clubs (like golf clubs) or non-business clubs like airline clubs at airports. The club or organization must have a specific business purpose, like a trade organization or a professional organization.
You can also deduct dues to public service organizations like the Rotary or Lions clubs, as long as their main purpose is to help communities.
Employee Education and Training Expenses
Deducting the cost of employee education and training expenses for employees and for yourself as a business owner is allowed by the IRS. A business must meet certain requirements to take the deduction for these expenses.
Educational assistance benefits may also be exempt from taxes for employees if they meet specific requirements.
The qualifications and restrictions are complicated, but this article on employee education expenses provides more details.
Most employee benefit costs, like providing health benefits and retirement savings plans, are deductible but there are some restrictions.
This article on employee benefits explains:
- The requirements for these benefits to be deductible to your business.
- When these benefits are taxable to employees.
- How to report these benefits to employees.
- How to include them in your business tax form.
Home Office Expense Deductions
You can deduct the cost of running your business from your home office if it is your principal place of business and if your home business area is used both regularly and exclusively for business purposes. Some expenses are pro-rated based on the percentage of space you use for your home business.
Meal Expenses (Entertainment Expenses Excluded)
Deductions for business entertainment expenses have been eliminated effective in 2018 and going forward as a result of the TCJA. But you can deduct meals (at 50%) at entertainment events if they are paid for separately.
Business-related meals can still be deducted at 50%. IRS rules say the taxpayer or an employee must be present and the meal must not be "lavish or extravagant."
Line 27a on Schedule C is the place to include those miscellaneous expenses that don't fit in any other category. This article on miscellaneous business expenses provides suggestions for expenses that might be included in this category so you don't miss any.
Office Supplies and Other Office Expenses
Your business can deduct costs of purchasing office supplies and materials and other office expenses This article explains the difference between office supplies and office expenses and how to deduct each type.
Taxes (Other Than Income Tax)
Any taxes you pay to local, state, and federal agencies may be deductible. Here is a comprehensive list of taxes you can can—and can't—deduct so you can make sure you have recorded all of these taxes for deduction purposes. Income tax payments are never deductible. Your federal income tax payments are not tax-deductible.
Travel Expenses for Business Purposes
Travel expenses can be deducted as business expenses, but there are many restrictions and qualifications. Business travel expenses must be separated from any personal part of your travel. You probably won't be able to take a spouse with you and deduct that person's expenses.
Read more details on deducting business travel expenses.
Some Business Expenses You Cannot Deduct
While almost all business expenses are deductible, don't forget there are some the IRS will say no to. These include political donations, hobby losses, entertainment expenses, fines and penalties, and commuting costs.