Top Tax Deductions for Small Business Owners: Maximize Your Savings

As a small business owner, navigating the complex world of taxes can be daunting. However, understanding and utilizing available tax deductions can significantly reduce your tax burden and boost your bottom line.

Tax deductions are a crucial way for small business owners to lower their taxable income and keep more money in their business.

“Small business tax deductions can help you pay less in taxes for the year, putting much-needed capital back in your business bank account. In some cases, these tax deductions can save you thousands of dollars,” explains Bankrate staff writer Sarah George.

This guide explores the most valuable tax deductions for small business owners, complete with real-world examples and practical tips to help you maximize your savings.

For many small business owners, especially in the wake of the COVID-19 pandemic, the home office has become an essential part of their operations.

The IRS allows you to deduct expenses related to the portion of your home used exclusively for business purposes. This can include a percentage of your mortgage interest or rent, utilities, insurance, taxes, and maintenance costs.

“You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat,” explains NerdWallet. “You can’t use it for a hotel or other temporary lodging.”

To qualify for this deduction, the space must be used regularly and exclusively for your business. You can deduct a percentage of your home expenses based on the percentage of your home used for business.

“Since the pandemic, many [entrepreneurs] have embraced a hybrid schedule or decided to ditch their offices altogether. Now, after investing in at-home monitors, standing desks, and Zoom-background-worthy bookshelves, they are discovering there’s a tax break for that—and giving their accountants a call,” says CPA Practice Advisor.

To maximize this deduction:

• Ensure your home office space is used exclusively for business.
• Keep accurate records of all related expenses.
• Consider using the simplified method ($5 per square foot, up to 300 square feet) if it's more advantageous.

Case Study:

• Scenario: Sarah is a freelance writer who works from home. She has dedicated a spare bedroom in her house as her office. The room is used exclusively for business purposes, and she spends most of her working hours there.
• Deductions Claimed: Sarah claimed the following home office expenses on her tax return:
  • Mortgage interest: A portion of her monthly mortgage payment.
  • Property taxes: A portion of her annual property taxes.
  • Utilities: A portion of her electricity, heating, and internet bills.
  • Home insurance: A portion of her homeowners insurance premium.
• Calculation: To determine the deductible portion of these expenses, Sarah calculated the percentage of her home that was used for business. Let's assume that the dedicated office space is 10 percent of the total square footage of her home.

She then multiplied each expense by 10 percent to determine the deductible amount. For example, if her monthly mortgage interest is $1,000, she could deduct $100 ($1,000 * 10%) as a home office expense.

• Tax Savings: By claiming these deductions, Sarah was able to reduce her taxable income and, consequently, her tax liability. This saved her money, allowing her to reinvest in her business or enjoy a higher income.

If you use a vehicle for business purposes, you can deduct the associated costs. There are two methods to calculate this deduction:

1. Standard Mileage Rate: For 2024, the rate is 67 cents per mile driven for business use.
2. Actual Expense Method: Deduct the business percentage of all vehicle-related costs, including gas, oil, repairs, insurance, and depreciation.

To make the most of this deduction:

• Keep detailed logs of your business mileage.
• Save all receipts for vehicle expenses if using the actual expense method.
• Choose the method that provides the larger deduction for your situation.

Case Study: A real estate agent who drives 20,000 miles per year for business could deduct $13,400 using the standard mileage rate for 2024 (20,000 x $0.67).

Business trips can lead to substantial deductions. Eligible expenses include:

• Transportation costs (flights, trains, taxis).
• Lodging.
• Meals (subject to 50 percent limitation).
• Dry cleaning and laundry.
• Business calls.

To optimize travel deductions:

• Maintain detailed records of all business-related expenses.
• Separate personal and business expenses clearly when on mixed-purpose trips.
• Be aware of per diem rates for meals and incidental expenses in different locations.
• Remember that meals are only 50 percent deductible in most cases.

What the IRS Says: Business travel deductions are available when employees must travel away from their tax home or main place of work for business reasons. A taxpayer is traveling away from home if they are away for longer than an ordinary day's work and they need to sleep to meet the demands of their work while away. Travel expenses must be ordinary and necessary. They can't be lavish, extravagant or for personal purposes.

Depreciation allows you to deduct the cost of major purchases over time, reflecting the decrease in value of business assets. The Tax Cuts and Jobs Act of 2017 significantly expanded depreciation benefits:

• Section 179 Deduction: Allows for immediate expensing of up to $1,160,000 in 2023 with a limit of $2,890,000 in total purchases, and this amount will go up to $1,220,00 with a capital purchase limit of $3,500,000 for 2024.
  
  
• Bonus Depreciation: Permits 100 percent first-year depreciation for qualified property through 2022, phasing down thereafter. Bonus depreciation is 80 percent for property placed in service in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.

To leverage depreciation effectively:

• Keep detailed records of all major purchases.
• Consult with a tax professional to determine the most advantageous depreciation strategy.
• Stay informed about changes in depreciation laws and limits.

Case Study: A small manufacturing company purchased $500,000 worth of new equipment in 2022. By utilizing bonus depreciation, they were able to deduct the entire $500,000 in the first year, resulting in tax savings of $165,000 (assuming a 33% effective tax rate).

Offering benefits to your employees not only helps attract and retain talent but also provides valuable tax deductions. Deductible benefits include:

• Health insurance premiums.
• Retirement plan contributions.
• Education assistance, including tuition reimbursement.
• Life insurance coverage.
• Paid employee leave.

To maximize this deduction:

• Explore various benefit options that align with your business goals and employee needs.
• Ensure all benefit plans comply with IRS regulations.
• Keep detailed records of all benefit-related expenses.

Real-World Example: The U.S. Chamber of Commerce says it can be a win-win to provide employee benefits as it can lead to higher job satisfaction, increased retention rates and lower turnover. “Funding these programs can be a significant upfront expense, especially on a tight startup budget. However, many of these benefits-related costs can be deducted when you file your business taxes.”

Fees paid to professionals who help run your business are generally deductible. This includes payments to:

• Lawyers
• Accountants
• Consultants
• Bookkeepers

To optimize this deduction:

• Retain invoices and receipts for all professional services.
• Ensure fees are reasonable and necessary for your business.
• Consider bundling services, when possible, to potentially reduce overall costs.

Real-World Example: The National Society of Accountants reports that the average fee for preparing a corporation tax return (Form 1120) is $826. This entire amount would be tax-deductible for the business. Fees paid for tax preparation, legal services, and business consulting are all deductible. Just be sure to keep detailed records of all professional services and their business purpose.

Several other valuable deductions are available to small business owners:

• Business insurance premiums: Deduct premiums for various types of business insurance, including liability, property, and business interruption insurance.
  
  
• Advertising and marketing costs: Expenses for promoting your business, such as online ads, print materials, and sponsorships, are fully deductible.
  
  
• Office supplies and equipment: Deduct the cost of items used in your day-to-day operations, from pens and paper to computers and software.
  
  
• Business loan interest: Interest paid on business loans or credit cards used for business purposes is deductible.
  
  
• Rent for office or retail space: If you lease space for your business, the rent payments are fully deductible.
  
  

Maximizing Your Tax Savings

Understanding and utilizing these tax deductions can lead to significant savings for your small business.

By keeping detailed records, staying informed about tax law changes, and working with qualified tax professionals, you can ensure you're taking full advantage of every deduction

Remember, every dollar saved in taxes is another dollar you can reinvest in your business's growth and success.

Contact Powell Tax Law today for a comprehensive review of your tax strategy, and assistance with your small business tax issues.