The Detailed List of Small Business Tax Deductions
For small business owners, tax deductions can help you free up funds to grow your business. Whether you're a long-time, seasoned, small business owner or a first-time self-employed startup, reducing your tax bill is a benefit that you can't deny.
- Advertising and Marketing
- Business Vehicle Use and Business Mileage
- Home Office
- Business Trips and Travel
- Client and Employee Entertainment
- Employee Salaries and Wages
- Office Equipment and Office Supplies
- Startup Costs and Expenses
- Non-Deductible Business Expenses
List of Deductible Small Business Expenses
1. Advertising and Marketing
Is advertising and marketing tax deductible?
Advertising and marketing expenses are 100% deductible, so make sure you keep the receipts and details of these promotional payments.
What qualifies for an advertising or marketing deduction?
- Print advertisements such as flyers, brochures, business cards, newspaper or magazine ads.
- TV advertisements
- Design cost, including hiring a designer or buying a pre-paid template.
- Add-ons and plug-ins
- Promotional campaigns
- Sponsorships, such as event sponsorships or sponsoring a sports team.
- Publicity campaigns
- Online marketing
- Google AdWords and other pay-per-click ads
- Facebook, LinkedIn and other social media ads
- Hiring ad agencies and SEO services for your business
What is not deductible?
- Advertisements on your vehicle (kind of)
- While you can deduct the cost of placing the advertisement on the vehicle, the actual cost of driving the vehicle is not counted as an advertising expense.
- Advertising that is affiliated with a political party or candidate.
- Marketing research and development expenses.
2. Business Vehicle Use and Business Mileage
Are business vehicles tax deductible?
If you operate a business vehicle or use your own personal vehicle for business purposes, you can deduct expenses relating to your vehicle usage.
If you use a vehicle solely for business, the IRS allows you to deduct 100% cost of owning and operating the vehicle. However, if you use your car for a combination of personal and business use, you'll expense only the cost of your business trips.
How do you deduct business mileage?
There are two ways that you can calculate your business mileage deductions, either via the Standard Mileage Rate or the Actual Expense Method.
Utilizing the standard mileage rate allows you to deduct expenses with a fixed rate per mile, while the actual expense method will require you to keep track of and record each expense.
1. Standard Mileage Rate
As of 2020, the IRS standard mileage rate is 57.5 cents per mile, down from 2019's 58 cents per mile. You can use the standard mileage rate if you own or lease your vehicle, and tends to be the preferred method if you predict you will put a large number of business miles on your vehicle per year.
2. Actual Expense Method
In the actual expense method, you deduct the actual cost of owning and operating your vehicle. This method is particularly useful if the vehicle you are using for business is an older model that you expect to have a lot of maintenance.
When using the actual expense method, it is beneficial to keep records of trip details such as:
- Trip purpose
What business vehicle expenses are deductible?
If keeping records under the expense method, these common expenses incurred while operating your vehicle should be counted into your deduction calculations.
- Gas and oil
- Toll charges
- Parking fees
- Registration costs
- Vehicle repairs
What is not deductible?
Certain business vehicles, such as dump trucks, and vehicles used for passenger transportation such as taxis, are not deductible on your business tax returns.
3. Home Office
Small business owners who work from home or those who use a portion of their home regularly for business purposes can get a
What qualifies a home office for tax deduction?
To get a tax deduction on home office expenses, the office must be the principal place of business or where you meet with customers clients regularly. This means that the space you're using for your home office should not be doubling as a second room in your home for any other purposes, and should be exclusively used in your home for business.
How to Deduct Home Office Expenses
There are two methods to determine your home office deduction, either via the simplified method or the standard method.
Using the simplified method allows you to calculate your rate by multiplying the square footage of your home office against a predetermined rate, while the standard, actual expense method will require you to track each expense and base your rate off of the percentage of your home that is used for business.
1. Simplified method
As of 2020, the IRS rate for home office deduction under the simplified method is $5 per square foot of office space up to 300 square feet.
2. Standard method
Under the standard method, you will track your actual expenses, then calculate your final rate based on the percentage of your home that is used for business. For example, if you calculate based on square footage that 10% of your home is dedicated to your home office, you may deduct 10% of your home office expenses.
What home office expenses are deductible?
- Direct expenses
- Painting your home office
- Repairs in the office
- Indirect expenses
- Utility bills - internet, phone Insurance
4. Business Trips and Travel
Traveling for business comes with many expenses, most of which are tax-deductible. If you take frequent trips for your small business, knowing what qualifies as a travel expense is crucial to saving money come tax time.
What qualifies as business travel?
To qualify as a business trip, the IRS has a few requirements for your travel.
- You are away from home longer than a standard workday, with an overnight rest or sleep.
- The purpose of the trip is primarily for business.
- The duration of the trip is less than a year long.
What expenses can I deduct while traveling for business?
While taking a business trip for your small business, there are many opportunities for tax deductions and expenses.
- 50% of your meal costs
- Generally, you can deduct half of your meal costs while traveling. The IRS limits these deductions to either the actual cost of your meal or the standard meal allowance.
- Lodging and airfare
- You can deduct plane ticket and baggage fees, unless you use frequent flyer miles to comp your ticket. You can also deduct your hotel booking and various fees, including $5 per day for incidentals such as tips to hotel staff.
- Transportation expenses
- Subway, bus fares, rental car, taxi and rideshare expenses between the hotel and place you will be working, the airport, train station, or traveling between you and your clients.
What is not deductible?
- Going on a business trip in your home town
- Bringing family with you on a business trip
5. Client and Employee Entertainment
Meals, recreation, and gifts for your clients and employees can become a growing expense as a small business owner. Luckily, a large percentage of these activities can be tax-deductible in the right circumstances.
What client expenses are tax deductible?
- While the rules regarding this deduction do get a bit tricky, you can deduct 50% of client meals if one employee was present. Remember, it is always wise to consult a tax expert to make sure you are calculating your deductions correctly.
- Client gifts have a limit of $25 per person per year for gifts to clients, so if you’re thinking of sending thank you gifts to clients this year, be aware of this deduction limit. Some exceptions do apply, such as gifts to a business entity or incidental costs of making gifts, which void the limit.
What employee expenses are tax deductible?
- Recreational and social activities
- 100% of the cost of recreational and social activities for employees are deductible, which includes holiday parties, picnics, and social gatherings.
- 100% of the cost of meals to employees at de minimis benefit (small amount, on occasion). This includes things like office snacks or small meals like pizza for employees working overtime.
- 100% of employee meals if promoting goodwill in the community, such as participating in a community event or a charitable organization
- 100% of employee meals if the meal is essential to your business (ie: your small business is a food blog).
- 50% of employee meals while traveling.
- 50% of employee meals in your place of business (ie: in the office cafeteria or break room).
- 100% of the cost of gifts given to employees.
What is not deductible?
- Entertainment, recreational, or social activities for clients
- After the 2017 Tax Cuts and Jobs Act, there is no more deduction for taking clients out to entertainment such as concerts or sporting events.
- "Lavish or extravagant” meals
- Personal meals
6. Employee Salaries and Wages
Are employee salaries and wages tax deductible?
The IRS considers the amount you pay your employees in salaries and wages to be a regular business expense, and thus it is 100% deductible.
How To Deduct Employee Salaries And Wages
There are two different timing options for how you will deduct employee salary and wage expenses, depending on your small business' accounting method.
1. Accrual Method
If your business is using the accrual method for accounting, you will claim the employee salary tax deduction for the year in which you are obligated to pay and get services from your employee, regardless of when you actually distribute the funds.
2. Cash Method
If your accounting is done under the cash method, you will claim your deduction in the year you actually pay your employee.
Are other employee benefits deductible?
While employee salaries and wages are tax deductible in and of themselves, there are other employee expenses qualifying under this category such as:
- Bonuses and commissions
- Payroll software
- Employee benefits
- Vacation time
- Employee education expenses
What is not deductible?
If your small business operates as a sole proprietorship or a single owner LLC, you cannot claim a deduction for your own salary or wages from your business.
As always, is important to check with an accountant or tax specialist to make sure that you are calculating and evaluating your deductions correctly.
7. Office Equipment and Office Supplies
Are office supplies and equipment tax deductible?
Supplies and equipment that you use for your small business during the year are 100% tax deductible.
What is the difference between office equipment and office supplies for deductions?
For tax deduction purposes, the between what qualifies as office equipment versus office supplies is that equipment is a long-term asset while supplies are a short term asset. Office supplies must be used within the year that they are purchased, while equipment is bought for the long term and thus is depreciated over time.
This means that your office equipment will be deducted in depreciated increments over the lifespan of the item, while your office supplies can be expensed and deducted when you purchase them.
What office supplies can you deduct on your taxes?
The most common business and office supplies deducted by small businesses include:
- Printer supplies (such as ink, and toner)
- Paper supplies (such as paper, staples, staplers, paperclips, binder clips, rubber bands, sticky notes, and tape)
- Writing utensils (such as pens, and highlighters)
- Break room essentials (such as paper plates, paper towels, plastic utensils, cleaning supplies, and beverages)
What business equipment is deductible?
Physical, tangible assets that you use for your small business are tax deductible expenses. These include things such as:
- Fixtures and displays
- Computers and computer equipment (as in: fax machines, printers, and copiers)
What is not deductible
Land or buildings that you own for your small business are not deductible under business equipment expenses.
8. Startup Costs and Expenses
The first year with your small business leads to plenty of expenses, but luckily there are many deductions available for the business bills you acquired before even opening your doors.
Are startup costs tax deductible?
In your first year, the IRS allows startups $5,000 of deductions in both startup and organization costs if your total costs were $50,000 or less. If your costs were over $50,000, your allowed deduction will be reduced by your exceeded dollar amount.
What startup costs are deductible?
- Business investigation (ie: market surveying, product analysis, visiting potential office or business locations)
- Employee training
- Wages and salaries
- Consultant fees (such as utilizing a lawyer or CPA)
What organizational costs are deductible?
- Fees associated with forming and establishing your business (such as forming your LLC, partnership, or corporation)
- Legal fees
- Accounting fees
Are my startup costs still deductible if I don't go into business?
The costs for purchasing and starting unsuccessful startups are still considered startup costs, so they can still be deducted. However, preliminary costs such as research and investigation are not.
Non-Deductible Business Expenses
What business expenses are not deductible?
Some tax deductions, no matter how important or necessary to your business, are not allowed.
- Fines and penalties
- Late fees, parking tickets, tax penalties, and other government fines are not an expense the IRS wants to see on your tax return this year.
- Club or membership dues and fees
- Even if you are using a recreational club or membership to entertain clients or employees, the associated dues and fees are not deductible.
- Political contributions
- Donations and contributions to a political group or candidate are not an allowable deduction.
Owning and operating your small business may come with many expenses, but taking advantage of the right tax deductions can help you return some of your investment and grow your business even further.
Additionally, an accountant or tax specialist can help you find tax deductions that you may have missed and make sure that your tax return is filed correctly and properly. Utilizing a professional not only guarantees that your taxes are in tip-top shape, but also gives you more time to dedicate to your business.
Posted: 07 Jan, 2020