Running your own business is awesome, but paying taxes is not. As a small business, you have to calculate and deduct your own taxes from your income - unlike employees, who get taxes deducted from their paycheck.
The good news is that the IRS doesn’t charge tax on every single dollar you earn. You can deduct regular business expenses, so that you don’t end up paying tax on the cost of running your business. To do so, you’ll need to list all your deductible business expenses on a 1099 tax form.
There’s a long list of tax deductible business expenses that can help small business owners to pay less tax. Here’s a list of some of the more and less common business deductions that can help to reduce your final tax bill.
Note: All the information here is for illustration purposes only. Every business is different, so it’s wise to discuss your business expenses with a tax professional.
The Most Important Tax Deductions for Small Business Owners
1. Accounting fees
The cost of any legal or professional services that you need to run your business are tax deductible. That includes the fees that you pay to your accountant and bookkeeper.
What if you don’t have an accountant or bookkeeper, and instead you do all your own bookkeeping using a program like QuickBooks, FreshBooks, or Bench?
Don’t worry; the fees you pay to use the software or online services also count for your small business tax deductions.
2. Advertising and Marketing
You can’t run any small business without marketing! That’s why all your advertising and marketing costs are completely deductible. It includes:
- Printing business cards
- Making flyers advertising your business
- Paying someone to design and build a business website for you
- Placing an ad in a local publication
- Buying online advertising
3. Car Expenses
Car and travel costs are some of the most common home business tax deductions. You might need a car or a van just for your business. For example, you run a floor cleaning business and need a large van to drive your equipment to each job, but you also have a small car that you use when you aren’t working. In this case, you can deduct the entire cost of running your van, including all the fuel and servicing costs and its estimated depreciation. It can be complicated to work out how much to claim for depreciation, so ask a tax adviser or consult this IRS guide.
If you use your car for both business and personal purposes, you can only deduct costs for business use. Imagine you run a personal trainer business, training people in their own homes. You drive 20 miles each month to get your equipment to people’s homes, and the rest of the time you use your car for regular personal use. You can only deduct the cost of fuel and maintenance for the 20 miles that you drive each month to get to clients’ homes.
4. Business Travel
You can claim business travel tax deductions under these conditions:
- Your trip is for longer than one normal day’s work
- Your trip is outside of your tax home, which is the entire city or area where you usually work
- Your trip is ordinary and necessary
For example, you’re a DJ in Des Moines, Iowa, and you’re traveling to do a gig at a wedding in San Diego, California. You can deduct the cost of your plane ticket to the wedding, accommodation overnight in a hotel nearby, and travel back home again.
Here are some of the costs you can include in your travel business tax deductions:
- Airfare, train ticket, bus ticket, or fuel for your car to get to and from your destination
- The cost of using your car, a rental car, or taxis once you arrive at your destination (for example, to get your DJ equipment from your hotel to the wedding location)
- Dry cleaning (e.g. your only suit got dirty on the journey, and you need to get it dry-cleaned before the wedding)
- Meals while you’re away
Small business owners often ask “Is business insurance tax deductible?” The answer is Yes! Reliable business insurance is vital for any small business. You can deduct all the cost of your business insurance premiums.
What’s more, your health insurance premiums, medical care expenses, and other costs like drugs, eyeglasses, and dental care, are also tax-deductible business expenses.
6. Retirement Contributions
When you’re a small business owner, you can include contributions to an IRA or other qualified retirement plan as part of your home business tax deductions, using Form 1040. The amount you deduct each year can’t be more than your total earned income for that year, or the annual maximum amount for retirement plan contributions.
7. Salaries and Benefits
If you have an employee, you can claim their salary, benefits, and vacation time as part of your small business tax deductions. The employee can’t be a partner in your business. Remember that you can’t deduct the salary you pay yourself, because you’re not an employee - you’re the business owner.
8. Child and dependent care
Deducting the cost of caring for a child or other dependent person is one of the small business tax deduction secrets. You can deduct the cost of child or dependent care as long as:
- Your child is 12 years old or younger
- Your spouse, or older child, is physically or mentally unable to care for themselves
For example, your 3-year-old goes to daycare so that you can run your handyman business. You can deduct the daycare fees from your tax return.
Or your spouse was injured in a car crash last year and needs someone to care for them round the clock. You have to leave them every day to run your gardening business. In this case, you could deduct the cost of paying for a carer to stay with them during your working hours.
Make the Most of the Small Business Tax Deductions
Tax deductions for small business owners are there to help your business grow. Now that you know what business expenses are deductible, you can cut down your final tax bill. It’s often worth it to hire a tax adviser or an accountant, to help you find all the small business tax deduction secrets that you might miss. This way, you'll free up even more money to grow your business.