17 big tax deductions for your small business

A tax write-off, also known as a tax deduction, is a specific expense you can subtract from your total income before calculating the taxes you owe. By reducing your taxable income, these deductions directly lower your final tax bill. However, for an expense to qualify, it must meet the criteria established by the IRS.

This guide focuses on the most common and significant tax deductions available to small businesses, particularly those structured as sole proprietorships or partnerships. The deductions cover a wide range of expenses, from direct operational costs to certain personal expenses that small business owners should know. Understanding these opportunities is the first step toward significant savings.

Maximizing your available tax deductions can lead to saving hundreds or even thousands of dollars each year. The impact of diligent expense tracking cannot be overstated, as it directly translates into more money staying in your business.

Consider a freelance writer who earned $60,000 in self-employment income in 2024. This income is subject to a 15.3% self-employment (SE) tax and regular income tax. The total tax liability, including an $8,478 SE tax and $4,865 in income tax, would be $13,343. This calculation assumes the writer is single with no dependents and has no other sources of income.

If that same writer discovered $6,000 in untracked contractor payments, those expenses could be deducted. This would lower their net self-employment income to $54,000. Consequently, the SE tax would drop to $7,630 and the income tax to $4,200, for a new total of $11,830. Simply by accounting for these expenses, the writer saves over $1,500.

Keeping your deductions in order

For many small business owners, knowing which deductions apply to their specific situation can be a challenge. It's common to put off organizing expenses until the end of the year, which often leads to missed opportunities. That small restaurant bill from last February? Without proper records, it’s easily forgotten, and those missed write-offs add up.

This is where meticulous bookkeeping becomes essential. To claim any deduction, you need to maintain accurate and organized records throughout the year. For those who find manual tracking tedious, automating the process is a game-changer. Services like Zenceipt can connect to your email inbox to automatically find and organize receipts and invoices, ensuring that no potential deduction slips through the cracks. This transforms year-end tax preparation from a stressful scramble into a simple, streamlined process.

The 17 most impactful small business deductions

Here is a list of 17 key tax deductions that small businesses can use to lower their tax burden. Think of this as a starting point for identifying potential write-offs. Remember to consult with a tax professional or CPA to confirm which deductions are applicable to your specific business structure and industry.

1. Advertising and Promotion: All costs associated with promoting your business are 100% deductible. This includes digital advertising, social media campaigns, website development, printed materials like business cards, and event sponsorships. However, expenses for lobbying or political contributions are not deductible.

2. Bank Fees: Service charges, transfer fees, and overdraft fees from your business bank accounts are deductible. You can also deduct transaction fees from third-party payment processors. Fees from personal accounts do not qualify.

3. Business Meals: Generally, you can deduct 50% of the cost of qualifying business meals. The meal must be an ordinary and necessary business expense, not overly extravagant, and you or an employee must be present. Meals provided for employees at the office, such as for working late or at company parties, are 100% deductible.

4. Business Insurance: Premiums for various business insurance policies are deductible. This covers liability, property, workers' compensation, professional malpractice, and auto insurance for business vehicles.

5. Business Use of a Car: If you use a vehicle exclusively for business, you can deduct its entire operating cost. For mixed-use vehicles, you can only deduct the portion related to business use. You can use either the standard mileage rate ($0.67 per mile for 2024) or the actual expense method, which tracks all vehicle-related costs.

6. Contract Labor: Fees paid to independent contractors or freelancers are fully deductible. If you pay a contractor $600 or more in a tax year, you must issue them a Form 1099-NEC.

7. Depreciation: Instead of deducting the full cost of large assets at once, depreciation allows you to spread the cost over several years. However, several provisions allow for immediate expensing:

   • De Minimis Safe Harbor: Allows you to expense assets costing less than $2,500 per item in the year of purchase.
   • Section 179: Lets you deduct up to $1,250,000 of qualifying new or used business property.
   • Bonus Depreciation: Allows for a 100% deduction of the cost of certain assets like machinery, equipment, and furniture in the first year.

8. Education: You can deduct the cost of education that enhances your skills for your current business. This includes seminars, workshops, industry-specific books, and professional publications. Education that qualifies you for a new career is not deductible.

9. Home Office: If you use a part of your home exclusively and regularly for business, you can deduct a portion of your housing expenses. The simplified method allows a deduction of $5 per square foot (up to 300 sq. ft.), while the standard method calculates the percentage of your home used for business and applies it to actual expenses like rent, utilities, and repairs.

10. Interest: Interest paid on business loans or credit cards is deductible, provided you are legally liable for the debt and there is a true debtor-creditor relationship.

11. Legal and Professional Fees: Fees from lawyers, accountants, and bookkeepers that are directly related to your business are deductible.

12. Moving Expenses: While personal moving expenses are no longer deductible for most people, businesses can still deduct the costs of moving equipment, supplies, and inventory to a new location.

13. Rent Expense: You can deduct rent paid for your business office, storefront, or other commercial spaces. Rent for a home office should be claimed under the home office deduction.

14. Salaries and Benefits: Wages, salaries, and benefits paid to employees are deductible, as long as the compensation is reasonable and for services actually performed. This does not apply to payments made to a sole proprietor or partner.

15. Taxes and Licenses: Various federal, state, and local taxes related to your business are deductible. This includes state income taxes, payroll taxes, property taxes on business assets, and business license fees.

16. Telephone and Internet Expenses: If you use your phone and internet for business, these costs are deductible. For mixed-use services, you can only deduct the percentage of use attributable to your business.

17. Travel Expenses: The costs of ordinary and necessary business travel are deductible. This includes airfare, lodging, meals (subject to the 50% limit), and transportation costs at your destination. The travel must be away from your primary place of business and require you to rest or sleep.

Personal deductions for business owners

Beyond business-specific write-offs, small business owners can often claim several deductions on their personal tax returns that are directly related to their status as entrepreneurs.

One of the most significant is the deduction for health care expenses. Self-employed individuals can typically deduct the premiums paid for health, dental, and vision insurance for themselves, their spouse, and dependents. This is an "above-the-line" deduction, meaning you don't have to itemize to claim it. Additionally, out-of-pocket medical costs can be included as itemized deductions on Schedule A.

Contributions to retirement plans are also deductible. The amount you can deduct depends on the type of retirement plan you have established for your business, such as a SEP IRA or a Solo 401(k). These contributions reduce your taxable income while helping you save for the future.

If you make charitable contributions to a qualified organization, you may be able to deduct them. While the business itself cannot claim this deduction, the owner can on their personal return. For smaller cash donations, you may be able to claim a deduction without itemizing, but larger contributions require you to itemize on Schedule A.

Finally, the Child and Dependent Care Credit can be valuable for business owners who pay for care while they work. This credit can offset a percentage of the costs for caring for a child under 13 or a dependent who is incapable of self-care. The credit is calculated based on your income and the amount of your care expenses. You can find more details in IRS Publication 503.