A business tax deduction is an expense that a business can subtract from its taxable income when calculating its federal income tax liability. Deductions can reduce a business’ taxable income and lower the amount of taxes owed to the government each tax year.
Here’s how it works:
- Calculates your business’ gross income, which is the total amount of money it earned during the tax year.
- Next, subtract qualified business expenses, such as rent, salaries, supplies, and other business-related expenses, from its gross income. We’ll go through the 30 most common business expenses further down below.
- The result is the business’ taxable income, which is the amount on which it must pay federal income taxes.
What counts as a business expense?
To determine what expenses are tax deductible for businesses, you can check the IRS guidelines and regulations or ask your bookkeeper or accountant. Generally, to be counted as a write off, business expenses must be ordinary, necessary, and reasonable. Ordinary expenses are those that are common and accepted in your industry. Necessary expenses are those that are helpful and appropriate for your business. Reasonable expenses are those that are not excessive in amount.
Below is a list of the 30 biggest tax deductions for businesses.
The 30 biggest tax write offs for businesses
- Business meals and entertainment: Business meals and entertainment expenses are deductible by up to 50% of the cost if the expenses are considered “ordinary and necessary.”
- Advertising and promotion: Deduct the costs of advertising and promotion, including flyers, commercials, and promotional events.
- Vehicles: You can deduct the cost of operating, maintaining, and repairing a vehicle used for business purposes.
- Office supplies and equipment: Write off the cost of office supplies, such as paper, pens, and ink, as well as equipment, such as computers, printers, and telephones.
- Rent and utilities: Deduct the cost of rent and utilities for any space used for the business.
- Depreciation: You can depreciate the cost of long-term assets, such as equipment and buildings, over time. For example, a newly purchased company car could have a 5 year depreciation on it, which means you can deduct 20% as depreciation each year for the first 5 years of ownership.
- Employee salaries and benefits: Deduct the cost of salaries and benefits for your employees.
- Legal and professional fees: Write off the cost of legal and professional fees, such as the cost of hiring an accountant or attorney.
- Interest on business loans: If you received a business loan, you can deduct the interest paid on the loan.
- Business insurance: Deduct the cost of insurance premiums for any coverage related to your business.
- Charitable contributions: You can deduct charitable contributions made to qualified organizations.
- Start-up costs: Deduct start-up costs, such as market research and advertising, in the year the business begins operations.
- State and local taxes: You may be able to deduct state and local taxes related to your business.
- Employee training and development: You can deduct the cost of employee training and development programs.
- Home office expenses: If you use a portion of your home for business purposes, you may be able to deduct a portion of your rent, mortgage interest, utilities, and other related expenses.
- Supplies and raw materials: You can deduct the cost of supplies and raw materials used in the production of their goods or services.
- Repairs and maintenance: Deduct the cost of repairs and maintenance on your business property.
- Software and subscriptions: Deduct the cost of software and subscriptions used for business operations.
- Business licenses and permits: Write off the cost of obtaining and renewing business licenses and permits.
- Rent for business property: You can deduct rent for property that’s used for business operations.
- Business use of personal property: You can deduct the fair market value of personal property used for business purposes.
- Health insurance premiums: You can deduct the cost of health insurance premiums for your employees.
- Pension and profit-sharing plans: Deduct the cost of establishing and maintaining pension and profit-sharing plans for your employees.
- Business travel: You can deduct the cost of business travel, including airfare, lodging, and meals.
- Business gifts: Deduct the cost of business gifts, up to a certain limit.
- Marketing and sales materials: Deduct the cost of producing and distributing marketing and sales materials, such as brochures and flyers.
- Professional memberships: Deduct the cost of professional memberships, such as trade associations.
- Bank fees: You can deduct the cost of banking fees, such as ATM fees and monthly account fees.
- Safety equipment: You can write off the cost of safety equipment, such as hard hats and safety glasses.
- Business meetings and conferences: Related to travel, you can deduct the cost of attending business meetings and conferences, including transportation and lodging expenses.
How to claim business tax deductions
To claim business tax write-offs, you’ll need to complete and file your business’ tax return with the IRS. The process can vary depending on the type of business structure you have, but here are the general steps:
Step 1: Gather your financial records and receipts: Keep detailed records of all your business expenses throughout the year, including receipts, invoices, and bank statements.
Step 2: Determine eligible expenses: Review the IRS guidelines to determine which expenses are eligible for tax deductions. Make sure your expenses meet the criteria of being ordinary, necessary, and reasonable. You can also ask your accountant if you’re unsure.
Step 3: Calculate your taxable income: Calculate your business’ gross income, subtracting eligible business expenses to arrive at your taxable income.
Step 4: Complete and file your tax return: Choose the appropriate tax form for your business structure and fill out the form with your business’ financial information.
Step 5: Claim your tax write offs: On your tax return, list the eligible business expenses you want to claim as tax write offs. The expenses will reduce your taxable income, which will lower your tax liability.