Small Business Tax Deductions Guide

Some business tax deductions are more complicated than others, and some deductions must be taken with caution, because they can be misused or result in an audit "red flag." 

In some cases, expenses might need to be amortized or depreciated (deducted over a period of several years) if they are startup costs, or if they are related to the purchase of business equipment.

Here is a list of common business tax expenses that you can deduct, including deductions that were brought about by the Tax Cuts and Jobs Act (TCJA), and have been in effect since the 2018 business tax year.

Qualified Business Income Deduction

The TCJA added a new tax deduction for business owners, called the qualified business income deduction (sometimes called a Section 199A deduction). This allows for an additional deduction of up to 20% of qualified business income, on top of normal business deductions.

The deduction is only for business owners who pay taxes through their personal tax returns, not for corporate shareholders.

Accounting and Legal Fees

You can deduct fees paid to an attorney, CPA, architect, or other professionals for services rendered as part of your business.

This includes the cost of having a tax professional prepare your business tax return. For sole proprietors and single-member LLC owners, you can deduct the cost of preparing your Schedule C, but you can't take a business deduction for the cost of preparing the rest of your tax return, because that's a personal expense.

You can't deduct tax, legal, accounting, or other professional fees or expenses as part of business startup expenses or to acquire business assets. These may be depreciated or amortized.

Advertising Expenses

You can deduct costs for advertising, publicity, and other marketing activities that are directly related to your business. This includes the cost of meals and entertainment at public events for advertising purposes, such as goodwill advertising to keep your brand name before the public, and public service advertising (like promoting contributions to a local food pantry).

The IRS specifically says you also can't deduct advertising on your personal vehicle.

Books, Professional Journals, and Software

You can deduct costs for business reference books, professional journals, and business-necessary software. These costs are deductible under the miscellaneous expenses category.

Car and Truck Expenses

Deducing expenses for business use of a vehicle is complicated. You can deduct the cost of driving for business purposes, but you must keep good records. 

You have two options for dedcuting business driving: the standard IRS mileage rate that changes yearly, or actual expenses.

Commissions Paid to Employees and Non-Employees

You can deduct commissions paid to employees and to outside contractors or others, including insurance agents and real estate agents who provide services to your business. There may be certain situations in which the commission can be amortized.

Dues for Clubs and Organizations

Your business can deduct dues for clubs and organizations, but not for social clubs (like golf clubs) or non-business clubs like airline clubs at airports. The club or organization must have a specific business purpose, like a trade association, chamber of commerce, or trade board.

Employee Education and Training Expenses

The IRS allows you to deduct the cost of employee education and training expenses for employees and for yourself as a business owner. A business must meet certain requirements to take the deduction for these expenses. Educational assistance benefits may also be exempt from taxes for employees if they meet specific requirements.

Employee Benefits

Most employee benefit costs, like providing health benefits and retirement savings plans, are deductible but there are some restrictions regarding:

• When these benefits are taxable to employees
• How to report these benefits to employees
• How to include them in your business tax form

Home Office Expense Deductions

You can deduct the cost of running your business from your home office if it is your principal place of business and if your home business area is used both regularly and exclusively for business purposes. Some expenses are pro-rated based on the percentage of space you use for your home business.

Meal Expenses (Entertainment Expenses Excluded)

You can deduct business-related meals at a rate of 50%. IRS rules say the taxpayer or an employee must be present and the meal must not be "lavish or extravagant."

There are some exceptions to the 50% limit, though. For example, you can deduct tax and tip, but you can't claim the miles you drove to and from the restaurant. Also, you can't deduct 50% for scenarios in which you and your colleagues take turns paying for meals that have no real business purpose.

Office Supplies and Other Office Expenses

In general, your business can deduct costs of purchasing office supplies and materials and other office expenses. To claim a deduction for office supplies, you have to meet the following requirements:

• You don't track when the supplies are used.
• You don't inventory your office supplies to start and end the year.
• Using this method doesn't "distort" your income.

Taxes (Other Than Income Tax)

Any taxes you pay to local, state, and federal agencies may be deductible. For example, you can deduct state income taxes in certain situations, and you can deduct payroll taxes. Your federal income tax payments are not tax-deductible.

Travel Expenses for Business Purposes

Travel expenses can be deducted as business expenses, but there are many restrictions and qualifications. Business travel expenses must be separated from any personal part of your travel. You probably won't be able to take a spouse with you and deduct their expenses.

Frequently Asked Questions (FAQs)