Small Business Tax Deductions 101: What You Can (and Can’t) Write Off

tax deductions for small business

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For small business owners and startup founders, navigating the complex world of tax deductions can feel like traversing a financial minefield. Yet, understanding and maximizing these deductions often marks the difference between merely staying afloat and truly thriving. The IRS allows businesses to deduct a wide range of “ordinary and necessary” expenses, but the devil, as they say, is in the details.

What exactly qualifies as a deductible expense? The IRS defines it as both ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your trade or business). This seemingly simple definition opens up a world of possibilities – and potential pitfalls. While it provides flexibility, it also demands careful documentation and justification.

As we delve into the specifics, remember that tax laws are as dynamic as the business world itself. What applied last year might not hold true for 2024. So, buckle up as we embark on this journey through the labyrinth of small business tax deductions, uncovering often-overlooked opportunities and strategies to maximize your tax savings.

Indinero’s virtual bookkeeping service simplifies record keeping. We’ll paint a financial portrait of your business that valuably informs your decision-making and protects you in the event of an IRS audit. When the time comes, contact us about our virtual bookkeeping services.

What Is a Small Business Tax Deduction and How Does It Work? 

A small business tax deduction lowers your tax bill by deducting income from your gross revenue. Since businesses pay tax only on profit, this lowers the amount one would pay when filing. 

Related: Calculating Gross vs Net Income


But what, exactly, counts as a valid business expense? The IRS paints a broad picture:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

The math behind tax deductions is sometimes misunderstood, so let’s examine the formulas. 

Incorrect: (Profit x Tax Rate) – Deduction = IRS Bill

Correct:    (Profit – Deduction) x Tax Rate = IRS Bill

In the correct method, the IRS subtracts deductions from profit before multiplying by the tax rate. In other words, deductions lower taxable income before taxes are applied, not after.  

The incorrect method would mean a lower overall tax bill, but unfortunately, this isn’t how the math is done. 

small business tax deductions

Top Small Business Tax Deductions

Home Office Expenses

The rise of remote work has made the home office deduction more relevant than ever. You’re sitting on a goldmine of potential deductions if you use a portion of your home exclusively for business. We’re talking mortgage interest, property taxes, utilities, and even maintenance costs – all partially deductible based on the percentage of your home used for business.

For those who’d rather skip the complex calculations, the IRS offers a simplified method: a standard deduction of $5 per square foot of home office space, up to 300 square feet. It’s less paperwork but might result in a smaller deduction. Choose wisely.

Vehicle and Travel Expenses

Your business vehicle isn’t just a mode of transportation; it’s a mobile tax deduction. The IRS offers two methods for deducting these expenses:

  1. Standard mileage rate: For 2024, it’s a whopping 67 cents per mile driven for business purposes.
  2. Actual expense method: Deduct the business percentage of costs like gas, repairs, and depreciation.

But don’t stop at the parking lot. Business travel opens up a whole new world of deductions. Airfare, lodging, ground transportation – it’s all fair game. Even 50% of your meal costs can be deducted. Just remember, these trips need to be primarily for business, not pleasure.

Advertising and Marketing Costs

In today’s digital age, marketing is more crucial – and more expensive – than ever. Fortunately, nearly all expenses related to promoting your business are fully deductible. This includes the obvious, like print ads and billboards, but also extends to more modern channels. That slick new website? Deductible. Social media ad campaigns? Absolutely. Even sponsorships and trade show expenses fall under this umbrella.

Office Supplies and Equipment

From the humble paperclip to the latest high-tech gadget, office supplies and equipment are the lifeblood of many businesses. And yes, they’re deductible. This category covers a broad spectrum:

  • Computers and software
  • Furniture
  • Stationery and postage
  • Cleaning supplies

For smaller items, you can usually deduct the total cost in the year of purchase. Larger purchases, however, may need to be depreciated over several years. We’ll dive deeper into depreciation later.

Professional Services Fees

Running a business often requires expertise beyond your own. The good news is that the fees you pay for that expertise are fully deductible. This includes:

  • Legal fees
  • Accounting and bookkeeping services
  • Tax preparation costs
  • Financial planning advice

Remember, these deductions apply to fees paid for business purposes. Unfortunately, personal legal or financial advice doesn’t count.

Business Insurance

In today’s litigious society, business insurance isn’t just a good idea – it’s essential. And yes, it’s deductible. This includes premiums for:

  • General liability insurance
  • Professional liability insurance
  • Workers’ compensation insurance
  • Commercial property insurance

Even specialized insurance, like cyber liability or business interruption insurance, can be deducted. It’s a small consolation for the premiums, but every bit helps.

Employee Salaries and Benefits

Your employees are your most valuable asset, and the IRS recognizes this. Wages, bonuses, and benefits paid to employees are generally deductible. This includes:

  • Health insurance premiums
  • Retirement plan contributions
  • Education assistance
  • Life insurance coverage (up to $50,000 per employee)

Remember, this applies to employees, not owners or partners. The rules for deducting your own salary and benefits are more complex and vary based on your business structure.

Depreciation

For major purchases like equipment or vehicles, you can’t always deduct the full cost in the year of purchase. Instead, you may need to spread the deduction over several years through depreciation. However, Section 179 of the tax code offers a silver lining: it allows you to deduct the full cost of certain assets in the year of purchase, up to $1,220,000 for 2024. This can be a game-changer for businesses investing significantly in equipment or technology.

Business Meals

While the days of the three-martini lunch are long gone, business meals can still offer a tasty tax deduction. You can deduct 50% of the cost of business-related meals. This includes meals with clients, prospects, or employees where business is discussed. Remember to keep detailed records: who attended, the business purpose, and the amount spent. Without this documentation, your deduction could be toast.

Education and Training Expenses

In our rapidly evolving business landscape, continuous learning isn’t just beneficial – it’s essential. Fortunately, the costs of improving your skills or those of your employees are deductible. This includes:

  • Workshops and seminars
  • Online courses
  • Books and subscriptions to professional publications
  • Certifications

The key here is that education should maintain or improve skills needed in your current business. A complete career change? That’s a different story.

It all starts with having your books organized. Taxes aren’t that difficult if you have your accounting squared away.”

– Jessica Mah, Co-founder & CEO of indinero

Your choice of cash vs. accrual accounting affects how depreciation is calculated on your taxes.  An indinero accounting and tax services professional can advise on the correct strategic decision for your business.

Often Overlooked Deductions

Startup Costs

Starting a business is expensive, but the IRS offers a small consolation: you can deduct up to $5,000 in startup costs in your first year of business. This includes expenses incurred before your business officially opens, such as market research and advertising. It’s not much, but for cash-strapped startups, every dollar counts.

Bank Fees

In the grand scheme of business expenses, bank fees might seem insignificant. But don’t overlook them – they’re fully deductible. This includes charges for business checking accounts, credit card processing fees, and loan origination fees. Over a year, these can add up to a substantial deduction.

Software Subscriptions

In our digital age, software is as essential to many businesses as electricity. Those monthly or annual subscription fees are fully deductible whether it’s cloud-based accounting software, productivity tools, or industry-specific applications. Just ensure they’re used primarily for business purposes.

Charitable Contributions

While personal charitable contributions are no longer deductible for most taxpayers, businesses can still deduct donations made to qualified organizations. This reduces your tax bill and allows you to support causes you care about. It’s a win-win.

Health Insurance Premiums

For self-employed individuals, health insurance can be a significant expense. The good news? You can deduct 100% of health insurance premiums for yourself, your spouse, and your dependents. This is an “above-the-line” deduction, meaning it reduces your adjusted gross income, potentially qualifying you for other tax benefits.

Tax deductions vs. tax credits

Tax credits are slightly different than tax deductions. They both lower tax liability by reducing taxable income, but the difference is if you get enough credits, you get a refund. Tax credits are efforts specifically implemented by legislators to incentivize certain businesses and behaviors. They’re serious enough about the incentive that they’ll sometimes pay you instead of the other way around. 

You can find a comprehensive list and filing instructions on the business tax credits page of the IRS website.

Additionally, we’ve written about The Employee Retention Tax Credit. We also provide R&D Tax Credit Services to businesses seeking to apply for this potentially complex deduction.
Startup Taxes: Requirements for Deductions


If you ever face an IRS audit, you must provide evidence that your claimed expenses were deductible. You’ll need:

1. Receipts and records documenting all expenses

2. A bookkeeping system

That’s it! It may sound easy, but keeping track of all your costs becomes more challenging and time-consuming as your business gets more complex.

You can make this process easier and spare yourself the clutter of the shoebox method by choosing a bookkeeping solution that allows you to upload and store your receipts.

Of the many accounting solutions, the best ones give you concrete financial data to make the best decisions for your business and taxes. 

Find out what we mean by booking a call with an indinero expert today. 

Keep in mind sometimes a receipt isn’t enough. Certain expenses require specific records. Deducting a personal car is one example. In this case, keep a log of miles traveled and receipts.  

tax deductions for small business
IRS Business Tax forms, business expense form and instructions with pencil and calculator

Final Thoughts

Navigating small business tax deductions can feel overwhelming. Understanding and maximizing your deductions can significantly reduce your tax liability, freeing up valuable resources to reinvest in your business’s growth.

Remember, meticulous record-keeping is crucial. Use accounting software to track small business expenses and store digital copies of receipts. Keep detailed logs for major purchases or deductions, such as vehicle use or home offices.

It’s also essential to understand the difference between deductions and credits. While deductions reduce your taxable income, credits directly lower your tax bill dollar-for-dollar. Familiarize yourself with available credits, such as the Research and Development Tax Credit or the Work Opportunity Tax Credit.

Lastly, don’t underestimate the value of business tax services. Tax laws are complex and constantly evolving. While this guide provides a solid foundation, consulting with a qualified tax professional for personalized advice tailored to your situation is always advisable. They can help you navigate the latest tax law changes, avoid common pitfalls like mixing personal and business expenses or misclassifying workers, and ensure you’re not leaving money on the table.

You can transform tax season from a dreaded chore into a strategic opportunity by staying informed, maintaining accurate records, and partnering with the right professionals. This approach allows you to optimize your financial strategy for long-term success. Remember, every dollar saved in taxes is a dollar you can reinvest in your business’s growth, whether developing new products, expanding your team, or exploring new markets.