6 Common Small Business Tax Deductions
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Tax deductions greatly benefit the average taxpayer, but they can bring even greater tax benefits to a small business owner, contractor, or freelancer.
Expensing business costs can help reduce taxes so you can put more money toward building your empire.
What counts as a deduction?
According to the IRS, to be deductible, a business expense must be both “ordinary and necessary.”
Ordinary means that the expense is common and accepted in your field. A necessary expense, on the other hand, is helpful or appropriate for your trade or business.
For example, a traveling salesperson could deduct car expenses, but a work-from-home freelance writer couldn’t (unless the car is used to drive to a work-related meeting).
Don’t forget to keep track of receipts and related accounts of when and why an expense is deductible. Remember that these expenses are usually deductible if the business operates to make a profit.
Personal expenses vs. business expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal use. You can deduct the business portion.
For example, suppose you borrow money and use 60% of it for business and the other 40% for a family vacation. In that case, you can deduct 60% of the interest as a business expense. The remaining 40% is personal interest and is not deductible.
Here are six small business tax deductions you can take to reduce your taxable income:
1. Home office deduction
Is there a specific space in your house that you use to work from home, and do you work from home regularly? If so, you can deduct certain home-related expenses, including mortgage interest, insurance, utilities, repairs, and depreciation. The home office deduction is available for both homeowners and renters.
2. Retirement plans
Contributing to a retirement plan is a simple way to take advantage of a tax deduction. Full-time employees with a work-sponsored retirement plan who freelance on the side can also use a SEP IRA or SIMPLE IRA.
3. Travel expenses
What if you want to visit your parents and there just happens to be a conference in the area?
You can deduct the cost of traveling to the conference and staying in the hotel while you squeeze in some time to visit with your folks. Just be careful about what you’re deducting. The IRS won’t view the cost of driving to your parent’s house or taking them out for a steak dinner as business expenses, and taking your kids with you can’t be expensed either.
4. Hire your children
That’s right. You can hire your kid (or kids) to help with the business. Your child can earn up to $13,850 in 2023 without having to file taxes.
If your business is taxed as a sole proprietorship or partnership (in which each partner is a parent of the child), you won’t owe any Social Security or Medicare taxes on your child’s income if they are under 18.
5. Holiday parties
You can indeed expense the cost of throwing a holiday party for your employees, but be careful. There are regulations (like all employees need to be invited). Keep a copy of the invitation and guest list, and don’t get too lavish.
6. Entertaining clients or customers
You don’t get Mad Men-era tax breaks anymore, but taking a client to a fancy dinner, concert, sporting event, or other entertainment for business purposes can be a write-off.
You can deduct 50% of the expense for 2023 (down from 100% in 2022), but make sure to keep proof of the guest list and how the event was related to business.
This article is for informational purposes only and not legal or financial advice.
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