18 small business tax deductions you need to know about in 2023
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If you're interested in saving your business money, one of the first places you should look is at your taxes. You can generate significant savings to help your business grow over the long term by taking advantage of tax deductions.
However, the United States tax code is highly complex. If you're a new business or startup, there are several major write-offs that you may be able to use but haven't considered.
These are some of the most common tax deductions and how they might apply to your small business tax write-offs.
What are tax deductions for businesses?
Tax deductions for businesses are specific business expenses you can use at tax time to reduce your taxable income. For example, say your company generated $1 million in revenue in 2022. You didn’t get to keep the entire $1 million, so why should you be taxed on it?
To address this, the IRS allows you to write off your business expenses. However, this only relates to specific types of expenses; in some cases, write-off amounts are capped.
In theory, if you paid $350,000 in expenses to generate the $1 million in revenue you generated last year, you should only be taxed on $650,000, your net earnings after expenses. Taking advantage of tax write-offs makes this possible.
Top 18 small business tax deductions
The bottom line is that if you operate a business, you should take advantage of every tax write-off available to you. The more you take advantage of, the lower your tax burden becomes, resulting in higher profits.
You must show receipts or other documentation as proof for many of these write-offs. Those should be kept in a file or box throughout the year to make things easier at tax time.
Find the 18 most beneficial tax write-offs for small businesses and the details associated with them below.
1. Self-employment tax
If you're self-employed, have a sole proprietorship, or are a freelancer, self-employment tax deductions are worth taking advantage of.
Part of your tax burden is the money you pay into the Medicaid and Social Security system. That works out to 15.3% of your net income. Social Security gets 12.4% of that, and Medicare gets the remaining 2.9%. The good news is that according to the IRS, you only deduct these taxes from 92.35% of your net earnings. Read this quote from the IRS website:
“You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.”
So, if you earn $100,000 per year, you'll only pay self-employment tax on $92,350 of your income.
2. Qualified business income deduction
In 2018, President Trump moved forward with new tax cuts known as the qualified business income deduction, the QBI deduction or Section 199A deduction. This deduction gave small business owners the ability to deduct part of their business income and applies to owners of:
- S Corps
- Pass through entities
- Self-employed individuals operating as sole proprietors
However, even if you have one of the entities above, you may not qualify for a tax break. There are many rules to consider as you file your small business taxes. The QBI tax break relates to the net amount of earned income, deductions, and loss from the business minus your wage income and capital gains and losses.
Moreover, this tax deduction only applies if your total taxable income from all streams you have is at or below $170,050 if you're single and $340,100 if you're married.
You should also consider other limitations, like the types of businesses that are allowed to take advantage of this tax break. In particular, the QBI tax write-off applies to specified services trades, businesses, or SSTBs. Those include, but aren't limited to:
- Financial services
- Investment management
Find a full list by reading the IRS's Facts About the Qualified Business Income Deduction.
If you own a business, you likely pay for at least one of the common types of insurance below:
- Energy and oil insurance: Business insurance products designed to protect operators in the oil and energy industry.
- Malpractice insurance: Insurance products that assist physicians and other professionals with covering the cost of malpractice events.
- General liability insurance: This insurance is a general policy designed to protect your business from the day-to-day liabilities it may face.
- Business income insurance: Business income insurance helps cover the loss of income when your business is interrupted by specific events.
- Commercial property insurance: This insurance protects the property and your company from liability associated with using the commercial property.
- Professional liability insurance: Professional liability insurance covers pilots, attorneys, and other professionals in events where their actions, or lack thereof, in a professional capacity lead to losses.
- Data breach insurance: This insurance protects your company if it becomes the victim of a cyber attack and a data breach leads to losses.
After all, insurance protects you and your company from the risks you'll likely face while you're in action. Moreover, you may be required by your clients, regulators, or local laws to carry insurance depending on the type of business you run.
The good news is that you can deduct the cost of your insurance policies as business expenses. The key here is that your insurance is considered "ordinary and necessary" for your industry.
“An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
That means you can write off your premiums for business insurance, worker's compensation insurance, employee health insurance, and more. Moreover, if you're self-employed, you may be able to write off a portion or all of your own health insurance premiums.
4. Qualified home office expenses
More people work from home today than ever before, and for good reason. Unfortunately, bills didn't stop rolling in. People had to learn how to make money from home if they were to financially survive the pandemic.
The good news is that the expenses associated with setting up a home office may be tax deductible. That means you can deduct some of your rent, mortgage, property taxes, utilities, repairs, etc.
There are two primary ways to deduct home office expenses:
- Simplified method – Deduct $5/square foot with a maximum of 300 ft2.
- Standard method – Track all qualified expenses of maintaining the home (rent, utilities, taxes, housekeeping, HOA, etc.) and multiply them by the percentage of your home that’s used as the office.
Regardless of the method you choose, the IRS says you can only qualify for home office expenses if you satisfy two key requirements:
- Regular and exclusive use – The percentage of your home that you write off must be used on a regular basis and must be exclusively used for business.
- Principal place of business – It's also important that your home is the primary place you conduct business. If not, you can't take advantage of these write-offs.
Beyond those two key requirements, it's important to consider other factors as you determine your qualified home office expenses.
- Non-connected structures - The square footage you write off doesn't necessarily have to be attached to your home. You can also write off the square footage or cost associated with external structures you use specifically for your business.
- Storage use - This includes any square footage of your home that you use to store business-related items like inventory and supplies.
- Rental use - Any portion of your home that you rent out as office space may also be used as a tax deduction.
- Daycare facility - If you use any portion of your home as a daycare facility, you may be able to take advantage of the qualified home office expense tax deduction.
5. Business travel expenses
It's common to travel for business—and if you do, staying away from home for a day or more, your trip may become a tax deduction. The key here is that the travel expenses must result from a trip relating to planned business purposes.
If they do, then they may count as a business deduction.
These planned business trips may be client meetings, educational opportunities, trade shows, and other events. If you incur expenses as you travel for these and similar events, you can probably write those expenses off.
According to the IRS, common travel expense write-offs include:
- Travel by airplane, train, bus, or car between home and business destination.
- Fares for taxis, ride-hailing services, or other types of transportation between your transportation (airplane, train), accommodation (hotel or rental), and work (meeting place or temporary work location)
- Shipping of baggage and sample or display material
- Use of your personal car
- Lodging and non-entertainment-related meals
- Dry cleaning and laundry
*These are usually 50% deductible, but there are some exceptions. For example, restaurants may able to write off 100% of their food costs. Also, you may be able to write off 100% of your meal expenses when you're traveling for work.
With so many write-offs available to you, it's important to keep accurate records, logs, and receipts. However, you don't have to spend hours after each trip categorizing to track your spending. Take advantage of Ramp's automated expense management system to assist with receipt matching, business expense categorization, and authentication.
6. Vehicle usage
If you use your personal vehicle or other means of transportation for travel to meetings away from your office, to visit clients, etc., there are two ways you can deduct your vehicle expenses when you file your taxes:
- You can deduct the exact amount of money you spend by keeping track of your depreciation, lease or loan payments, gas, oil, tires, repairs, tune-ups, insurance, and registration fees. At the end of the year, add up all of these expenses to deduct the exact amount of money you spent.
- You can also track your mileage and write off the standard mileage rate, which changed halfway through 2022 from 58.5 cents per mile to 62.5 cents per mile. The rate for 2023 is 65.5 cents per mile.
You cannot usually deduct vehicle expenses if you only use your vehicle to drive to and from your office daily, as that is considered normal commuting. If you're traveling for more than a day, your expenses are more likely to count as travel.
7. Advertising and promotion
Advertising is how you bring new clients through the doors. Without it, your sales could fall flat. As a result, you can write off costs like:
- Giving your website a facelift
- Getting a new logo designed
- Purchasing virtual ad space
- Hiring an influencer or ad agency
- Launching a website
- Running a social media marketing campaign
- Printing business cards
8. Business meals
Many of the biggest business deals are closed over a nice meal. If you conduct business while you eat, the meal cost is 50% tax deductible. Moreover, if you provide meals for employees during parties and picnics, 100% of those meals are tax deductible.
Depreciation is an accounting term that describes the falling value of assets over their useful life. For example, if you purchase a car for $35,000 and try to sell it a year later, you can expect to lose 20% of your purchase price in the first year and 10% yearly thereafter.
So, if you own business vehicles, the value lost in those vehicles each year becomes a write-off. But vehicles aren’t the only assets that might experience depreciation. Some other examples include:
- Farming equipment
- Manufacturing equipment
- Office furniture
Depreciation may be difficult to track. Although there are set averages for how much a car’s value may fall over time, that may not be true for unique business equipment. Have a chat with your tax professional about items you think may depreciate in value and how that depreciation may help reduce your overall tax burden. Anytime you make a purchase for your business, make sure you hold onto the receipt.
It's also worth noting that you have options for calculating depreciation and writing it off. In particular, some items may qualify for a full depreciation in the year they were purchased, or they may be something you want to depreciate over time. The IRS guidelines give a set number of years for property types to help you determine the depreciation value.
10. Debts and bank fees
As a business owner, you may have multiple bank accounts and a few business loans with fees like:
- Account maintenance
- Wire transfers & ACH payments
- Merchant fees
- Interest on debts
- Loan origination, maintenance, and late fees
Did you get an associate degree in business in an effort to start your business with the knowledge you need to succeed? Are you attending school to expand your education in your field of expertise?
That’s a great thing—not just for you and your business, but regarding your tax burden.
Education expenses for you or employees you send through educational programs may be 100% tax deductible. According to the IRS, self-employed individuals can write the following line items off on their tax return:
- Lab fees
- Supplies for art and science projects
The IRS also states that you can deduct similar items related to your education when you file your taxes. This includes any expense directly related to your education that’s not covered above.
Regarding corporations and other businesses outside of self-employment, the rules surrounding this deduction are a bit more strict. You are able to give scholarships to your employees to help them further their education and take advantage of the tax benefits associated with doing so.
However, to take advantage of the tax benefits, you must structure the scholarship as a grant program that meets individual grant requirements and seek IRS approval before providing the scholarship.
12. Business software
Technology has changed the way we do just about everything. That’s true for our personal lives and our business lives. As a business owner, chances are that you have multiple subscriptions automatically charged to your business credit card on a daily basis. For example:
- Accounting and bookkeeping software: QuickBooks, Xero, NetSuite, Sage Intacct
- Customer relationship managers (CRMs): Salesforce, Freshsales, HubSpot, Zoho CRM
- Process management software: Asana, monday.com, Slack
- Ad management software: Hive, Function Fox, Basecamp, Intervals
- Copywriting and editing software: Grammarly, Pro Writing Aid, Writer.com, Scrivener, Autocrit, Antidote
The software solutions mentioned above are a few examples, but there are numerous types of software you could use to improve your business. When you do, the money you pay to use that software is tax deductible.
13. Independent contractors
You may hire independent contractors for one-time jobs or regular work. If that person and their work fit the guidelines for an independent contractor, then you may write off payments made to them. For example, you might outsource for the following:
- Graphic design
- Business consultants
- Website design, development, and maintenance
- Copywriting and editing
- Basic handyman work
- Electrical issues
These independent contractors are necessary for the ongoing growth of your business. As such, their fees should be tax deductible.
14. Legal fees
You might need to pay an attorney for some of the following reasons:
- To develop a contract for a new service you intend to launch
- For legal questions relating to the operation of your business
- For questions relating to the legality of specific taxable events
- For defense against a frivolous lawsuit
The good news is that the costs associated with legal services are usually tax-deductible. This doesn't just include what you pay to the attorney either. You can also write off expenses like court fees and transportation to and from your attorney's office and the courthouse.
15. Business-related clothing
You may be able to write off the cost of some clothing for your business, though this doesn't apply to regular clothes that you've purchased to wear to the office.
The IRS states that businesses can write off promotional expenses that are ordinary and common in the industry. Moreover, adding your logo to clothing is a promotional activity. Therefore, if it's ordinary for businesses in your sector to provide uniforms with your logo printed on them, that may be a tax-deductible expense.
16. Real estate expenses
Depending on the type of business you operate, your business may incur real estate expenses for regular and additional space. For example:
- Virtual real estate (a virtual office you pay for monthly to maintain a professional appearance)
- Storage expenses
- Office expenses
No matter what type of real estate your company resides within, that real estate comes with a cost. If you purchased it outright, the purchase cost should be a write-off. You may be able to write off your mortgage interest and property insurance costs if you purchased the property with a mortgage. Finally, if you pay rent, 100% of the cost of your rent may be tax-deductible.
However, there are some nuances to consider. For example, you cannot deduct your rent if you pay an unreasonably high price. Also, there are certain stipulations for home offices, and you must write off rent paid in advance in the year you pay it.
17. Employee retirement plans
The costs associated with 401(k)s can be 100% tax-deductible. Any cost you pay that’s associated with the administration of the retirement plans plus any employee match investments (up to specific per-employee limits) you make to help bolster retirement savings may also help reduce your taxable income.
18. Bad debts
Money that is owed to you but you're unable to collect may count as a bad debt. Loans and credit sales are two types of transactions that can fit into this category. Although they can be a headache, you can use them to your advantage at tax time.
You can write off the total value of any bad debt in the year it became valueless, provided it meets IRS requirements of a bad debt. Stay on top of doing so to avoid missing any deadlines.
Ramp: Making taxes easier
It’s important to consider how you manage your prep for the upcoming tax year. Revisiting prior months’ expense reports and planning for tax season can be a significant hassle, draining your time and resources.
This is where the Ramp card can help.
More than just a corporate card, Ramp comes with automated expense tracking and reconciliation software that helps you file and organize receipts, control your spending, and export the data to create an audit trail.
The IRS has recently released a guide, making it easier for businesses to navigate the 2022 tax code. You can find that guide here. There were a few big changes to small business tax deductions in 2022, including:
- An increase in the maximum net earnings of self-employed individuals that's subject to self-employment tax
- An increase in the standard mileage rate
- A new form for commercial building energy efficiency deductions
- Changes to the qualified paid sick leave and qualified paid family leave payroll tax credit
You can also expect more changes to come down the line for small business tax deductions in 2023.
Theoretically, there’s no limit to the total amount of money you can claim as write-offs, provided it's for actual expenses that were incurred by your business. Attempting to reduce your company’s taxable income with personal expense write-offs is tax fraud, and a crime met with hefty penalties. There's a chance that you'll be audited, and too many write-offs may increase that possibility.
The information provided in this article does not constitute legal or financial advice and is for general informational purposes only. Please contact an attorney or financial advisor to obtain advice with respect to the content of this article.