If you own a small business, one of the smartest ways to boost your profits is to make sure you are taking all the deductions you are entitled to on your taxes.
Doing so can lower your taxable income and allow you to hold on to more working capital for your business.
But the U.S. tax code for small businesses is fairly complicated and does get revised often. It’s important to stay up to date on these changes.
The good news is that there are several tax credits available if you make your business facilities more energy efficient or purchase an electric vehicle to be used for business. Read on to learn the latest.
Key Points
• Small business tax deductions can significantly boost profits by reducing taxable income.
• Tax credits are available for energy-efficient building improvements and electric vehicle purchases.
• Deductions can include advertising costs, insurance premiums, and interest on business loans.
• If your home office meets IRS criteria, you can deduct some or all of the related expenses.
• Accurate financial records are essential to avoid tax mistakes and maximize benefits.
What Are Small Business Tax Deductions?
Small business tax deductions (or write-offs) are business-related expenses that you can subtract from your taxable income.
According to the Internal Revenue Service (IRS), business expenses must be both ordinary and necessary to be considered deductible. An expense is “ordinary” if it’s common and accepted in your trade or business. An expense is “necessary” if it’s helpful and appropriate to your business. An expense generally doesn’t have to be indispensable, however, in order to be considered necessary.
Many types of qualified business expenses are specifically addressed on the tax return, with a line to enter the deductible amount. Other qualified expenses can be listed separately.
How Do Small Business Tax Deductions Work?
Virtually all businesses have to file a tax return with the IRS, but how much you’ll pay in taxes generally depends on how much your business has earned after qualified expenses have been deducted.
A small business tax deduction is an expense that you can deduct from your income to reduce your federal and state tax bill. A business could earn plenty of revenue and potentially pay no taxes if its deductions and credits reduce its taxable income to zero.
If your business brought in $150,000 in revenue, for example, but you had $50,000 in tax-deductible business expenses, you would then only be taxed on $100,000 of revenue, which could save you many thousands of dollars compared to what you’d owe on $150,000.
A 100% tax deduction is a business expense of which you can claim the entire cost on your income taxes. In some cases, however, you may only be able to claim a portion of the expense on your tax return.
General Rules for Deduction Eligibility
In preparing your business’s tax return, it’s important to understand the eligibility requirements for each deduction before you claim it. The IRS’s rule of thumb is mentioned above: A business deduction is allowable if the cost is “ordinary and necessary” for your industry.
Items that are tax-deductible for small business fall into the categories of direct expenses, indirect expenses, and interest on debt. However, the IRS rules out certain specific expenditures, including real estate renovations, social club dues, and political contributions. Fines and certain legal settlement payments are also not deductible.
Claiming a small business tax write-off that you’re not eligible for could lead to an audit and possibly a penalty.
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22 Small Business Tax Deductions
Whether you’re just starting a small business or your company is already well established, here is a list of write-offs that may be available to you. It can be a good idea to consult a tax professional, like a CPA, to find out which small business tax tips are appropriate for your situation.
1. Advertising and Promotion
The cost of advertising and promoting your business is typically 100% deductible. This can include costs related to hiring someone to design a business logo, launching your website, buying ad space in print or online media, running a social media marketing campaign, or sponsoring an event.
2. Car Expenses
If you use your car for business activities, such as driving to see a client or going to the store to buy office supplies, the costs may be tax deductible as long as you keep track of the mileage. The deductible mileage rate for tax year 2024 is 67 cents per mile. For 2025, the rate is 70 cents per mile.
If you have only one vehicle and use it for both personal and business needs, you will likely need to separate the mileage in order for car expenses to be considered a self-employed tax deduction.
3. Energy-Efficient Improvements
Thanks to the Inflation Reduction Act, qualifying small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power — lowering operating costs and protecting against the volatile energy prices that are currently squeezing small businesses.
Small business building owners can receive a tax deduction of up to $5.65 per square foot (for tax year 2024) to support energy efficiency improvements that deliver lower utility bills.
4. Purchase of an Electric Vehicle
If you bought a new, qualified plug-in electric vehicle (EV) in 2023 or after, you may be eligible for a clean vehicle tax credit up to $7,500 under Internal Revenue Code Section 30D. You may be able to claim it by buying a qualified new car or light truck. The credit is available to individuals and businesses.
The maximum credit is $7,500. It is nonrefundable, so you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years.
5. Child Care Facilities for Employees
If you provide child care for your employees either on-site or through a contract with an outside facility, you could be eligible for the Credit for Employer-Provided Childcare Facilities and Services. The credit is available for 25% of the care facility expenditures plus 10% of the resource and referral costs. It’s capped at $150,000 per tax year. You would claim it by filling out Form 8882.
6. Bad Debt Write-Offs
If you loaned money to an employee, client, or supplier and it wasn’t paid back, or if you made credit sales to customers that were never paid, you may be able to claim the outstanding debt as a business tax deduction.
Typically, to write off these debts, you need to have proof that it was indeed a business debt and not a personal loan.
7. Business Meals
Do you take clients (or potential clients) out for meals to discuss business? If so, these costs may be 50% tax-deductible. The snacks and meals you buy for your employees are also typically 50% deductible. Food provided at company parties is generally 100% deductible.
In order to be eligible, food costs typically need to be reasonable — extravagant meals likely won’t qualify. They must also be available to the whole staff, not just highly compensated employees.
8. Business Insurance Premiums
You likely have at least one type of insurance coverage for your company and/or your staff. That might be workers’ compensation, liability, property, or data breach insurance. If the type of insurance is considered ordinary and necessary, you can typically write off 100% of your policy premiums.
9. Business Loan Interest
If you’ve taken out loans for business purposes, including lines of credit and mortgages on business real estate, or if you’ve used business credit cards, the interest you pay on those loans may be 100% tax-deductible.
10. Payments to Contractors and Freelancers
If you hire freelancers or independent contractors to help in your business, you may be able to deduct their fees as a business expense. You may also want to keep in mind that if you pay a contractor $600 or more during the tax year, the IRS typically requires you to submit a Form 1099-NEC to both the IRS and the contractor.
11. Education and Training Expenses
If you invest in furthering your knowledge and expertise to give you a leg up in the market, or provide your employees with educational benefits, you may be able to write off some of these costs as business expenses.
Tax-deductible education expenses can include: classes and workshops intended to improve skills in your field, subscriptions to professional publications, attending industry seminars and webinars, and getting business certifications.
12. Equipment Depreciation and Section 179 Deductions
Depreciation is a way of spreading the cost of business equipment or assets over time. It essentially measures how much an asset’s value has been used up or exhausted during the year.
Items that can be depreciated by small business typically include computers and other office equipment, machinery, office furniture, and business vehicles. For more specifics, you can read “Topic No. 704,” a document about depreciation, at the IRS website.
13. Business Gifts
If you give clients and prospects gifts as part of your business, the IRS generally permits you to deduct up to $25 per person per year. Any amount you spend over the $25 limit is not deductible.
A gift given to a member of a client’s family is also typically looked at as a gift to the client, unless you have a personal connection to the family member.
14. Home Office Deduction
Do you run your business out of your home? If so, you may be able to deduct expenses tied to creating and maintaining that workspace.
To qualify for the home-office tax deduction, you generally must utilize part of your home regularly and exclusively for business. The office does not need to be in a separate room, but it must be in a space solely designated to work and business operations.
You can typically deduct home office expenses in one of two ways: simplified (in which you multiply a specified rate by the square footage you use for your business, up to a maximum deduction of $1,500) and regular (which involves you itemizing expenses for home office use, including mortgage interest, rent, insurance, utilities, and depreciation).
15. Legal and Professional Fees
If your business has incurred legal expenses, such as hiring a business lawyer or going to court, you are generally able to deduct them as a business expense. Even if you go to court and do not win the case, those legal fees will likely qualify for deduction.
The legal expenses incurred, however, typically must be considered ordinary and necessary to the business in order to be considered a tax write-off.
Also, expenses you may incur when hiring professionals like bookkeepers, accountants, and tax preparers for your business are generally deductible.
16. Office Supplies and Business Tools
Every pen, sheet of paper, and toner cartridge you purchase for your business can typically be written off on your taxes.
For supplies to be deductible, they generally need to be considered essential to running and maintaining a functional office. It can be a good idea to keep receipts and categorize these small business expenses as you go. This can make it easier to file your taxes at the end of the year.
17. Professional Memberships and Subscriptions
Any expenses related to obtaining or maintaining professional licenses or memberships in an industry organization may be deductible.
18. Rent for Business Premises
If you pay rent for an office, warehouse, retail space, or other type of business property, that monthly rent expense may be fully tax-deductible. If you deduct rent as a business expense, you will typically not be able to take the home office deduction as well.
19. Salaries and Employee Benefits
As long as they’re not for you or other business partners, employee salaries and benefits are generally considered write-offs for small businesses.
This category typically includes employee wages, paid time off, commissions, and bonuses, as well as employer-sponsored life insurance or retirement account contributions.
20. Startup and Organizational Costs
If you started your business in the latest tax year, you may be able to write off up to $5,000 of the expenses you invested in launching.
Startup expenses generally include any costs incurred to create or buy the business, such as expenses related to marketing, travel, training, and forming a corporation or partnership.
21. Phone and Internet Expenses
Generally, what you spend to provide your business with internet and phone service can be written off in order to lower your tax liability. If you use the phone and internet for a mix of work and personal reasons, however, you can typically only write off the percentage of the cost that goes toward your business use.
22. Business Travel and Lodging
If you travel for work, such as to visit clients or attend industry events, your travel expenses may be considered business tax write-offs. This can include transportation (flight, rental car, train, parking, and tolls), hotel stays, and meals.
How to Claim Small Business Tax Deductions Effectively
To prevent missing out on credits and deductions, you could likely benefit from hiring a skilled accountant. Your accountant should be able to identify all the expenses you can deduct. You may already be familiar with some — such as the rent you pay for your home office, interest on business loans, and travel costs — but there may be many others that fit your particular case.
Keeping careful financial records, including receipts, should help ensure your accountant has all the needed documentation come tax time. Between filings, if you are considering a costly business move, it’s wise to check in with the accountant beforehand to learn about any tax breaks you might be able to claim.
Common Mistakes to Avoid When Filing Business Taxes
Plenty of small business owners make mistakes when filing their company’s tax return. Here are some to watch out for:
• Neglecting to separate personal and business finances. This complicates recordkeeping and tax filing.
• Failing to track expenses accurately. Without accurate accounting, you may miscalculate your estimated taxes.
• Overlooking available deductions and tax credits your business qualifies for. Some examples might be home office expenses or depreciation.
• Delaying or skipping quarterly estimated tax payments. Paying these on time can help you avoid penalties for lateness and underpayment.
• Not setting aside money to pay quarterly federal, state, and self-employment taxes. To cover these tax bills, it’s a good idea to escrow 30% to 40% of your net income per year.
The Takeaway
One of the simplest ways to reduce your income tax bill is to ensure you’re claiming all of the tax deductions available to your small business. Understanding which business expenses qualify can help you avoid overpaying come tax time. It can also help guide your business decisions throughout the year and help you decide if it’s time to explore small business financing.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What qualifies as a small business tax deduction?
The IRS says that a small business expenditure qualifies as a tax deduction if the expense is both ordinary and necessary. An expense is “ordinary” if it’s common and accepted in your trade or business. An expense is “necessary” if it’s helpful and appropriate to your business.
How can I maximize my business tax deductions?
In order to maximize your business deductions, it’s likely a wise move to hire a tax professional, such as an accountant or attorney. They are likely to have the best grasp of all the deductions you’re eligible for, because they stay up to date on the tax statutes and IRS guidance.
Are home office expenses fully deductible?
Home office expenses are generally deductible if your work area meets the IRS requirements: a designated space in your home that’s used regularly and exclusively for business operations. If you qualify for this deduction, you could fully write off direct expenses such as rent and utilities – but only the percentage that applies to your home office.
If you opt for the IRS’s simplified calculation method, the maximum home office expense deduction is $1,500.
Can I deduct business meals and entertainment?
Restaurant meals with clients and in-office lunch or snacks you buy for your employees are typically 50% deductible. Food provided at company parties is ordinarily 100% deductible.
Overall, the food must be reasonably priced and available to the whole staff.
As for entertainment, you generally can’t deduct any expenses for those events.
What records do I need to keep for tax deductions?
You’ll likely benefit from tracking your business activity in your ledger or accounting software. Per the IRS, your records should show your gross income and your purchases, sales, payroll, and other transactions.
Keep all documents that support your deduction claims. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks.
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