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Tax Write-Offs for Small Businesses

As a small business owner, understanding the intricacies of tax deductions can significantly impact your financial bottom line. In this article, we'll delve into the world of tax write-offs, exploring various expenses and investments that you can claim to reduce your taxable income and ultimately save money. Whether you're a seasoned entrepreneur or just starting your venture, learning about these write-offs can empower you to make informed financial decisions, optimize your tax planning strategies, and ensure your business remains in compliance with the tax laws.

What Are Tax Write-Offs?

Tax write-offs refer to deductible expenses that individuals and businesses can claim on their tax returns to reduce their taxable income. These expenses, allowed by the Internal Revenue Service (IRS), can include business-related costs, charitable contributions, medical expenses, education expenses, and more. By deducting these eligible expenses from their total income, taxpayers can lower their tax liability, potentially leading to a higher tax refund or a lower tax bill. Proper record-keeping and compliance with tax laws are crucial to take advantage of these deductions effectively and legally.


Small Business Tax Write-Offs

Running a business is a costly affair. Thankfully, the IRS allows small businesses to deduct some expenses through tax write-offs. Here is a list of some of the most common tax deductions:

Business insurance

Luckily, the IRS agrees. According to the IRS publication 535, you can deduct your necessary and ordinary insurance premiums as business expenses. That means if you pay for any insurance which is necessary for your business and common among similar businesses, it qualifies.

Here are some common insurances that match “ordinary and necessary” criteria:

  • Property coverage for your buildings and equipment
  • Workers’ compensation coverage
  • Life insurance for employees (as long as you, the business owner, is not a beneficiary)
  • Auto insurance

Education expenses

Upskilling is a great way to grow your business for self-employed professionals such as writers, coders, and some service providers. And you can slash your education costs from your self-employment income (which will reduce both income and self-employment taxes).

The deduction for work-related education expenses and certain miscellaneous expenses will be the amount that exceeds 2% of your AGI.

You can deduct:

  • Tuition, books, and lab fees
  • Cost of research
  • Certain travel expenses

To claim business education, you must file Schedule C (Form 1040), Schedule C-EZ, or Schedule F.

Business use of your car

Using personal vehicles for business purposes is common. If you do, too, you can deduct the cost of operating the vehicle as a business expense.

If you use one of your personal vehicles only for business-related travel, then it’s pretty straightforward: You get to deduct the entire cost.

However, if you use it for both personal and business purposes, you can only claim deductions only for the latter.

There are two ways to calculate your vehicle expenses:

  • Standard mileage: It’s as simple as multiplying a standard IRS mileage rate with the total business miles traveled. In 2023, the standard mileage rate is set at $0.655/mile.

Starting January 1, 2024, the elevated "standard" rate climbs from $0.655 per mile to $0.67 per mile, while the reduced "other vehicle available" rate drops from $0.22 per mile to $0.21 per mile.

  • Actual expense method: As the name suggests, this method requires you to keep track of all the repairs, insurance, registration fees, and lease payments. To calculate your deductions, just multiply those expenses by the percentage of business miles.

The rule of thumb here is whichever method gives you a higher number; you go with that. Also, you can’t switch from one method to another on the same vehicle.

Please note miles driven while traveling between your home and workplace don't count. Those are personal trip miles. Only if you move from your place of work to another location can you count that trip.

You can claim a vehicle tax deduction for travel expenses by filing IRS Form 4562. This form is filled out by all firms claiming depreciation and amortization deductions for their businesses. Section 179 deductions are also claimed through this form. Explore in detail how to write off vehicle expenses.

Contract labor

If you hire freelancers or independent contractors and pay them more than $600, that expense qualifies as a business expense.

To report that, file form 1099-NEC. You need multiple copies to send them to different parties. One copy would go to the IRS, one to the state tax dept, one to the contractor, and the last for yours to keep.

Home office expenses

Do you use a section of your home as your primary place of business? Then you might qualify for a home office deduction.

However, to qualify, two boxes must be checked off first:

  • Your home office must be your main place of business. You must conduct important business operations from your home.
  • Your work area must be identifiable and used for business only. You may not have a separate room, but a permanent work setup must be there. Don’t forget to save some photos of your workspace as evidence in case the IRS chooses to audit you.

There are two ways to figure out your home office deductions:

  1. Simplified method: Deduct $5 per square foot of the home office space up to a maximum of 300 square feet.
  2. Standard method: In this method, first, you must keep track of home maintenance expenses, such as mortgage interest or rent, utilities, real estate taxes, housekeeping homeowners association fees, and repairs. During your tax deduction calculation, multiply these expenses by the percentage of your home used for business use.

If you use the standard method, file Form 8829 along with your Schedule C (Form 1040).

Read on to see who can claim a home office tax deduction, what the surrounding rules are, and how much you can claim as a home office deduction.

##Legal and professional fees

You can deduct the costs of legal and professional services necessary for your business, like fees paid to lawyers, accountants, bookkeepers, and tax preparers.

If these fees include payments for personal tasks (like making a will), only partial deduction (the part of the fee that is specifically related to your business) is allowed.

401(k) contributions

One of the big tax benefits of offering a 401(k) is that you can deduct the matched contribution (to employee 401(k)) from your income taxes. Since 401(k) employer contributions can go up to $40, 500 (2022), it can be a great way to keep taxable income within certain tax brackets.

Pro tip: Instead of offering a raise, consider an extra contribution. When you raise someone’s base pay by a certain amount, both employer and employee become subject to higher FICA. It can significantly reduce the effective raise amount.

On the other hand, matching contributions to 401(k) is deductible. Therefore, if you match the same amount (instead of offering a raise), the employee receives the full benefit while you, as an employer, can write off a part of that amount. A win-win situation for both parties.

The 401(k) tax form refers to the reporting of distributions from a 401(k) retirement account on your federal income tax return. When you withdraw funds from a 401(k) account, it is typically considered taxable income, subject to income tax at your ordinary tax rate. Check how to file 401(k) tax forms with our step-by-step guide.

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