In this article, we will look into the 20 best tax deductions for small businesses. If you want to skip our detailed analysis, you can go directly to the 5 Best Tax Deductions For Small Businesses.
Small Businesses and High Interest Rates
On March 7, Reuters reported that the Federal Reserve released a report stating that small businesses have recovered from the pandemic but still face challenges to grow further. High interest rates and unavailability of workers are leading to financial burdens for businesses. Moreover, the staggeringly high rates increased debt payments for many small businesses in 2023, according to a survey by the Cleveland Fed. The report highlighted that the most common issues faced by small firms and businesses are the rising costs of goods and services and high wages.
While these rate hikes emphasize the challenges faced by small businesses, tax deductions offered by the IRS for small businesses can help alleviate some of this burden. Tax deductions such as interest rate costs, professional services, and other business expense write-offs can help small businesses with their financial burdens. On January 21, Reuters reported that the US House of Representatives passed a $78 billion tax relief to support businesses and low-income families, alleviate financial burdens, and boost economic growth. This tax measure will temporarily reinstate income deductions on business R&D and capital investments through 2025. You can also check out easy-to-start small businesses that could elevate your income and best small business ideas for senior citizens.
Companies Providing Tax Services to Small Businesses
Some of the top companies providing tax preparation services to small businesses include CBIZ, Inc. (NYSE:CBZ), Intuit Inc. (NASDAQ:INTU), and H&R Block, Inc. (NYSE:HRB).
CBIZ, Inc. (NYSE:CBZ) is a leading tax services provider. The company provides a variety of business advisory solutions, from business transition to HCM solutions. The company also provides national resources and local retirement plan services to more than 2,000 small businesses across the US. On March 6, CBIZ, Inc. (NYSE:CBZ) reported that it has acquired CompuData, Inc., a leading company that provides technology solutions to small and midsize organizations and businesses. The company's portfolio of services includes cloud computing, accounting ERP software, and tools to scale. This impressive portfolio of CompuData, Inc., along with its workforce and $20 million annual revenue, will increase the technological capabilities of CBIZ, Inc. (NYSE:CBZ).
Intuit Inc. (NASDAQ:INTU) is a technology and software development company specializing in financial services. The company owns the leading software platforms TurboTax and QuickBooks. Both platforms provide solutions for small businesses, sole proprietorships, S-corps, LLCs, and partnerships. They help with tax filing and support businesses to maximize their tax deductions. On February 21, Intuit Inc. (NASDAQ:INTU) announced the launch of its new digital tool to help sole proprietors. The new tool will provide convenient features to solopreneurs to help them manage their finances, set trackable goals, and manage business expenses to simplify the tax preparation and deduction process.
H&R Block, Inc. (NYSE:HRB) is a leading provider of tax preparation services, small business solutions, and other financial services. On January 29, the company launched the Beneficial Ownership Reporting Service to assist small business owners in complying with the new Corporate Transparency Act. This service by H&R Block, Inc. (NYSE:HRB) will help over 32 million small business owners impacted by the latest ownership rules by the US Treasury Department's Financial Crimes Enforcement Network (FinCEN). Business owners are required to register detailed ownership information to FinCEN, as of January 1, 2024.
Small business owners with their laptops sitting at a coffee shop, discussing their digital advertising strategy.
Methodology
To compile our list of the 20 best deductions for small businesses, we conducted exhaustive research by reviewing over 10 similar publications and identifying the standard tax deductions across our sources. We then collated a list of the 30 tax deductions and shortlisted the 20 best tax deductions for small businesses based on their frequency of occurrence across our sources. We also consulted the IRS to provide insights about the tax deductions for small businesses on our list.
20 Best Tax Deductions For Small Businesses
20. Bad Business Debt
Bad business debt refers to the outstanding loan balance that cannot be recovered and is subsequently removed from financial records. Some examples of bad business debts are loans provided to clients, distributors, employees, and suppliers, business loan guarantees, and customer credit sales. IRS provides a deduction for bad debt if included in the income or loaned out cash of the business. A filer can claim the deduction on Schedule C Form 1040 or their business income tax return. It is one of the best tax deductions for small businesses.
19. Charitable Contributions
Another tax deduction that small businesses can claim is charitable contributions. Tax filers can apply for the deduction on Schedule A and deduct 60% of their adjusted gross income for an itemized deduction. Individuals can deduct up to 100% of qualified contributions, while corporations can deduct up to 25% of the taxable income. Qualified contributions include contributions made to qualifying organizations and cash contributions.
18. Interest Expense
Taxpayers can claim a deduction on interest expenses incurred in the taxable year. The interest expense must be below the sum of the taxpayer's business interest income, 30% of the adjusted taxable income, and floor plan financing interest expense for the taxable year. However, for the taxable years beginning in 2019 and 2020, a limit of 50% adjusted taxable income may apply, according to the CARES Act.
17. Healthcare Insurance
Healthcare insurance is another tax benefit that sole proprietors and small business owners can claim. Under the Internal Revenue Code Section 162 (l), taxpayers can deduct premiums paid for themselves, their spouse, and their dependents on the tax return. However, the insurance cost must not exceed the earned income from the business for which it was purchased. If a sole proprietor has more than one business, the deduction can be claimed for each business as long as the deductible amount does not exceed the earnings of the specific trade.
16. Utilities
Utilities tax write-offs are among our list of the best tax deductions for small businesses. If a small business is set up in a home office, the owner can claim a tax deduction for specific home expenses, including utilities. Utilities such as water, heat, sewage, phone, internet, and electricity bills can be written off.
15. Business Tax and Licenses
Business taxes and licenses related to business or the taxable business income are deductible. Moreover, the annual payments made for business licenses are also deductible as a business expense. Some other deductions include state income taxes, personal property taxes, real estate taxes, sales taxes, excise taxes, and business licenses.
14. Retirement Contributions
Retirement contributions refer to the amount paid for a retirement plan. Small business owners, including sole proprietors, can claim a tax deduction on retirement contributions. There are different limits depending on the retirement contributions plan. The limit for the 2023 taxable year is $330,000, and for 2024 it is $345,000. Self-employed individuals can deduct the plan contributions on Form 1040 Schedule 1. Some of the limits of plan contributions include IRA contributions, 401(k) and profit-sharing plan contribution limits, catch-up contribution limits, and defined benefit plan benefit limits, among others.
13. Startup and Organization Cost
Startup costs are the transactions made to create an active business or assess a business acquisition. According to the recent developments by the IRS, taxpayers can claim $5,000 in tax deductions for startup costs after October 22, 2024. The condition for a $5,000 deduction is that the total startup cost must not exceed $50,000. The deduction amount will decrease as the cost surpasses the total startup cost limit.
Startup cost deductions can only be claimed if they meet the IRS requirements. Qualifying costs include business-related surveys and analysis expenses, startup advertisements, salaries and wages, travel and other miscellaneous expenses, and professional services costs. However, interest, taxes, or research costs do not qualify for startup tax deductions.
12. Office Supplies
Another tax benefit that small business owners can avail of is the tax deduction for office supplies. These supplies may include printers, stationery, industry-specific supplies, paper, computers, furniture, and other work-related supplies, including software required for business purposes. Work-related shipping costs can also be written off, given that the receipts are available for documentation.
11. Legal and professional service
Legal and professional service is one of the best tax deductions for small businesses. Services including consulting, business coaching, legal advice, tax preparation, and bookkeeping qualify for tax deductions. These costs are deductible on Schedule C. Legal fees paid to acquire business assets do not qualify for deduction. Furthermore, tax preparation fees can also be deducted on Schedule C.
10. Business Property Rent
Small business owners can claim a deduction on their business property rent. However, businesses need to figure out whether an agreement is a conditional sales contract or a lease. A conditional sales contract does not qualify as a rent expense deduction. If a business owner uses their home as a workplace, their home office qualifies as their principal business location. In that case, business owners can claim a rent expense deduction.
If the rent is paid in advance, the business owner can only deduct the cost attributed to using the property during the tax year. Moreover, a small business can also claim a deduction for the payment incurred for the cancellation of a business lease.
9. Business Meals
Small business owners can claim tax deductions for meal expenses related to business. For instance, travel meal expenses on a business trip are deductible. To claim the deduction on your travel meal expense, the business owner can opt for either of the two methods: actual cost and standard meal allowance. In the case of actual costs, all records and receipts of actual expenses must be maintained. The standard meal allowance includes federal meals and the incidental per diem rate. These rate lists are based on different locations and can be checked on the official website of the US General Services Administration.
The meal expenses cannot be deducted in the absence of an employer or employees. Small business owners can claim a 50% deduction for business-related ordinary meal and entrainment costs. However, the activity must be strictly business-related with a clear objective, such as promotion, customer base expansion, networking, training, or drafting a business plan. The typical meal deduction is up to 50%. However, for parties and specific events, 100% of costs are deductible
8. Education and Training
Small business owners can claim a tax deduction on education and training expenditures related to their business. For the training costs to be deductible, the education must aid the business owner in improving or maintaining skills related to or applicable to their business. Moreover, keeping the present salary and job is also a requirement to claim an education and training expense deduction. The education expenses will not qualify for a deduction if it will lead to a new trade or business.
Education costs incurred during a momentary absence from work can also be deductible if the education meets the requirement. Some deductible education and training-related expenses include tuition, supplies, books, lab fees, transportation and travel, research, and other educational expenses.
7. Home Office Expenses
Home office expense write-off is one of the best tax deductions for small businesses. Business owners or partners can claim the deduction for home expenses related to their business. For the home office to qualify for the tax deduction, the house must be the principal business location of the trade. Business owners can also deduct expenses for business use of the home for rental use, daycare business, or other similar business.
Some business expenses that are deductible for a home office include mortgage interest, real estate taxes, rent, casualty losses, insurance, utility, maintenance, and depreciation attributable to business purposes.
There are two methods to deduct the expenses for business use of the home. The first is the regular method, which requires the business owners to calculate the home office expense deduction by dividing the total expense into business and personal use. Direct business expenses can be deducted in total, while indirect costs can be allocated to the portion of the home space used for business. For instance, qualified daycare business owners might not use their homes exclusively for business. However, they must determine the business use percentage based on their business hours. Business owners can compute the deduction using Form 8829 and file for the tax deduction on Schedule C, Form 1040.
The other method is the simplified method, which allows taxpayers to calculate the deduction for business use of the home using a specified rate of $5 per square foot of the portion in business. Using this method, taxpayers can deduct the home office expenses directly on Schedule C instead of Form 8829. Despite the method used to calculate the deduction, taxpayers cannot deduct expenses that exceed the gross income limitation.
6. Salaries and Benefits
Among other tax deductions, small businesses can also write off salaries, bonuses, commissions, and non-cash compensation paid to full-time or part-time employees. Businesses can also claim deductions for paying freelancers, contractors, and other non-employees by filing the 1099-NEC form, the IRS form for independent contractors and non-employees.
Fringe benefits are usually part of an employee's gross income and are subject to employment taxes. Businesses can deduct the costs of fringe benefits, which include vacations, property and service discounts, travel discounts, and memberships.
