Types of Deductible Expenses
A tax deduction, commonly referred to as a tax write-off, is a business expense used to reduce a company's taxable income and, in turn, the amount of taxes a business owner has to pay. These expenses must be directly related to the business's operations and activities.
Below are 20 common business expenses that you may be able to deduct to maximize your small business profits:
Note: Though our LLC expenses cheat sheet is a list of common deductions, some may not apply to your business. We recommend business owners consult a tax accountant for a more specific list of deductions.
Recommended: Use FreshBooks accounting software to find more deductions and support for your small business.
Self-employed individuals, including independent contractors, freelancers, and business owners, are responsible for paying both income and self-employment taxes on their income. However, if you’re self-employed, you can write off half of your self-employment tax as an income tax deduction.
IRS Reference: Topic 554: Self-Employment Tax
Startup Business Expenses
If you have $50,000 or less in startup costs and are in your first year of business, the IRS allows you to deduct $5,000 in startup costs and $5,000 in organization costs from your taxes.
If your startup expenses exceed $50,000, the total deduction will be reduced by however much your expenses exceed $50,000. For example, if your total startup expenses total $51,000, your allowed deduction will be $4,000.
This deduction does not apply if you have more than $55,000 in startup costs.
IRS Reference: Publication 535: Business Start-up and Organizational Costs
Office Supplies and Services
Generally speaking, office supplies refer to those that are used to run day-to-day office activities, such as papers, pens, sticky notes, ink, printing, postage, and delivery services.
Small business owners can deduct the entire office expense by using write-offs on the cost incurred on the incidental materials and supplies.
IRS Reference: Publication 535: Supplies and Materials
Any expenses directed toward advertising, marketing, and/or promotions are deductible expenses. This includes but is not limited to logo creation, printing business cards, website updates, printing costs, and social media marketing. Some businesses also use large advertising mediums like billboards and television commercials.
IRS Reference: Publication 535: Advertising Expenses
Business insurance includes any kind of protection required to run a business safely. Though the insurance varies based on business type, there are several premiums you could deduct, including those for property coverage, employee health insurance, liability insurance, and workers' compensation insurance.
IRS Reference: Publication 535: Insurance
Business Loan Interest and Bank Fees
You may be able to deduct interest charged on a business loan, including interest rates, monthly service fees, business banking overdraft costs, and payment processing fees. The IRS provides guidelines on what types of loan interest are considered deductible and what types are nondeductible.
Those with business credit cards can also deduct the convenience fees.
Tip: See our review of the best business credit cards to find an easy-approval secured or unsecured credit card for your small business.
Any educational courses or forms of training used to acquire new skills or certification for your business can be a deductible expense. This can include books and research materials that assist with professional development.
For the cost to be deductible, your education must be aimed at improving skills or maintaining your job, salary, or status. Any expenses used for the education and training of employees are also deductible.
IRS Reference: Publication 535: Education Expenses
The IRS describes depreciation as "an allowance for the wear and tear, deterioration, or obsolescence of the property." In other words, depreciation is a tax deduction that allows businesses to write off the value of certain tangible property over a period of time, typically throughout that property's "useful life."
If you use property partially for business use and partially for personal use, you can only deduct depreciation on the business usage. For example, if you purchase equipment for $20,000 and use it for business only 75% of the time, the business portion of that equipment's cost is only $15,000.
IRS Reference: Publication 946: How to Depreciate Property
Home Office Expenses
If your business operates out of your home, you can take advantage of the home office deduction that results from the cost incurred for business purposes. This includes rent, utilities, repairs, maintenance, cleaning, and any other expense associated with the office space.
You can compute home office deductions by calculating the cost, multiplying by the area's square footage, and subtracting the value from the total. Alternatively, you can use the IRS simplified method where you deduct $5 per square foot of the office space for a maximum of 300 feet.
IRS Reference: Publication 535: Personal Versus Business Expenses
Legal and Professional Fees
Some legal and professional fees are considered deductible, including lawyers, bookkeepers, tax professionals, and accountants that you employ in order to operate your business.
IRS Reference: Publication 535: Legal and Professional Fees
Travel Business Expense
Self-employed people can write off certain travel expenses for their businesses, including but not limited to airfare, business meals, lodging, and local travel.
The IRS defines travel expenses as a business trip outside your tax home, overnight, and for business roles. That being said, there are some restrictions that are stipulated for international travel.
IRS Reference: Topic 511: Business Travel Expenses
Business Car Usage
A portion of the costs associated with business vehicles is deductible every tax year, including mileage and other operating costs for cars, trucks, and other commercial vehicles. If you use a vehicle for both business and personal usage, only the business costs will be eligible for the tax deductions.
Companies can either use the standard mileage rate or actual car expenses for their business tax deductions. The standard mileage rate for business vehicle use is 57.5 cents per mile. Actual car expenses can include depreciation, licenses, gas, tolls, maintenance, lease payments, insurance, and parking fees.
IRS Reference: Publication 463: Car Expenses
Rent spent on office space (or the cost spent on space occupied by office equipment if you work from home) may be considered for tax deductions. Spaces that you rent out occasionally for work purposes can also be considered write-offs.
IRS Reference: Publication 535: Rent
Similar to the above, business equipment that is rented for certain small business services (e.g., construction equipment, power tools, etc.) can be considered a deduction. (Personal equipment is excluded from this deduction.)
Such equipment comes with additional costs such as liability insurance and money spent on renting it. The insurance cost is meant to offer security to the equipment owner, and such costs are deductible to reduce business expenses.
Cost of Goods Sold
Businesses that buy products for resale or make products can deduct the cost of goods sold (COGS) from their gross receipts. COGS may include raw materials, labor, and supplies.
IRS Reference: Publication 535: Cost of Goods Sold
LLC tax deductions may also cover a self-employed individual's retirement contributions. The total amount of the deduction will depend on the individual's retirement plan and their maximum contribution limits.
Charity and Gifts
Charitable contributions in the form of cash payments are often deductible. That being said, any charitable contributions made that are directly related to your business. For example, a donation made to bring a business convention to your community would not be considered a charitable contribution.
All or part of the expenses used for business gifts can be deducted. That being said, the IRS implements a $25 deduction limit on every direct and indirect gift your business gives individuals throughout the tax year.
Any business-related expenses for utilities, including heat, electricity, telephone services, water, and sewerage can be deducted. If you work from home, you cannot deduct basic telephone service; however, you can deduct the costs of long-distance business calls as well as the installation of a second, separate telephone line.
IRS Reference: Publication 535: Utilities
Recommended: Learn more about accounting software in our best accounting software review.
How to Minimize Your Taxable Income
Self-employed business owners may face several tax burdens when starting their new business. Below are some saving techniques that could help maximize your profits at tax time.
Utilize Above-the-Line Deductions
Above-the-line deductions are the expenses used to calculate your adjusted gross income (AGI), which is then used for below-the-line deductions (i.e., most business expenses).
Above-the-line deductions can be calculated using Schedule 1 of your individual tax return and can include educator expenses, self-employed retirement plans, self-employed health insurance, and early withdrawal penalties.
Pay Taxes on Time
Self-employed individuals are mandated by the IRS to pay their designated taxes quarterly. Fail to comply and you will be subjected to penalties and potentially high fines.
A paycheck calculator can be an effective starting point to execute timely tax payments., as it can help you discover the quarterly amount required to pay. In addition, it also helps you discover a deductible itemized list.
Save Funds for the Tax Season
Even if you already pay your required quarterly payments on time, it's good practice to set funds aside in a business bank account for tax filing. Even if you think that your tax payment will be the same as years prior, it's important to keep track of your business income so that you can account for any fluctuations.
In many cases, if you underpay the IRS for your quarterly taxes, you will not be penalized if you still paid 100% of what you paid the previous tax year. Still, some individuals, including those whose AGI was more than $150,000, have different thresholds.
Know What Taxes You Need to Pay
In addition to both federal and state income taxes, you may also need to file state-specific business taxes. For example, some states levy a business privilege tax or franchise tax on certain business structures, including LLCs. These can be flat rates or dependent on your business’s profits.
Incorporate Your Business
If you operate your business as a sole proprietorship or a partnership, you can choose to incorporate as an LLC or corporation. Not only will this move provide you with limited liability protection, but it will also provide you with unique tax benefits.
Outsource for Help
While you can research and complete your tax deductions yourself, using a professional service to help determine your business expenses can help ensure that you find the best write-offs for your business's activities.
Business activities are subjected to numerous tax deductions from costs such as licenses, self-employment tax, capital expense, professional liability insurance, office, and travel costs, to name a few.
Incorporating this cheat sheet when filing tax returns can help you save your business money. Timely payment of taxes, utilizing above-the-line deductions, payment of state and federal taxes, and seeking external tax professional help can attenuate the taxable amount.
Frequently Asked Questions
What expenses can you write off as an LLC?
There is a long list of expenses that you can deduct as an LLC. Some of the main operating costs that can be deducted include startup costs, supplies, business taxes, office costs, salaries, travel costs, and rent costs.
Can an LLC write off food expenses?
Yes, food expenses are deemed as deductible costs. This will only happen if the meals are with a business contact and aren't “lavish or extravagant.” You can cut 50% of the business meals costs or 100% based on the temporary 2021/2022 exception.
How do you write off a car as a business expense?
If you use your own car for business purposes, you can incorporate it as a business expense on your cheat sheet. In addition, if you lease a car for business use, you can indicate the percentage of business functions it serves for your business on the cheat sheet.
Can an LLC deduct expenses without an income?
There are certain thresholds that the IRS has put in place to determine whether you can deduct costs without earnings based on whether you have a true business or if it’s considered just a hobby.
Can you write off capital expenditures?
Unlike ordinary business expenses, the IRS doesn’t allow capital expenditures to be immediately deducted from a business's profits. Instead, they are gradually deducted from your business profit over the course of several years through amortization, or the depreciation of an asset’s value of a fixed period of time.