One of the simplest ways to save your business money long-term is to reduce your tax burden. And to lower your taxable income, you need to apply every tax deduction available to you.
Even if you’re a seasoned tax veteran, you might be surprised by some tax write-offs you hadn’t previously considered with your business structure. And if you're a newly established business or startup, there are some major ones you should definitely utilize.
So, what can you write off on taxes when becoming a business owner? Let’s run through the most common deductions and the business activities they apply to so you can gain a better understanding of business taxes.
Jump to the section that interests you most:
- Self employment tax
- Qualified business income deduction
- Business insurance
- Qualified home office expenses
- Business travel expenses
- Vehicle usage
- Advertising and promotion
- Business meals
1. Self employment tax
Are you considered self-employed, or do you have a sole proprietorship?
Even when you don’t have employees, you’re expected to pay into Medicaid and social security, which is 15.3% (12.4% Social Security, 2.9% Medicare) on net earnings. Fortunately, the government allows you to deduct these from 93.25% of your net income. Per Investopedia:
“The self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income. The IRS treats the “employer” portion of the self-employment tax as a business expense and allows you to deduct it accordingly.”
For instance, if you owe $4,000 in annual self-employment taxes, you’d need to pay that money when it comes due. Then, when tax time comes, $2,000 would be deductible on your 1040 individual income tax return. That said, if you are an LLC or a corporation, your tax deductions will differ.
2. Qualified business income deduction
In 2018, as a part of the Trump tax cuts, a new provision called the qualified business income deduction (QBI deduction; Section 199A deduction) was added. It allows small business owners to deduct a part of their business income on their taxes. It’s applicable for the owners of:
- S Corps
- Pass through entities
- Self-employeds operating as sole proprietors
That said, not every business qualifies for a tax break. There are several rules and restrictions that apply to filing small business taxes and the owners of small businesses. QBI is the net amount of income gain, deduction, and loss from the business included in your taxable income minus interest income, wage income, and capital gains and losses.
Per Kiplinger, if your total taxable income (including the business’ and other income streams) is at or below $163,000 for single filers or $326,600 for joint filers, then you may be eligible for a 20% deduction on taxable business income. There are also some limitations on the type of businesses allowed to make this deduction, namely those that are listed as specified services trades or businesses (SSTBs). This includes but is not limited to:
- Financial services
- Investment management
For a full list of exceptions, review the IRS’ Facts About the Qualified Business Income Deduction.
3. Business insurance
Whether it’s general liability or commercial property coverage, insurance helps protect you as a small business owner from the inherent risks of the job. And many businesses are required to carry various types of business insurance because of contracts, regulations, or state laws.
If you’re operating a for-profit business, insurance can be deducted as a business expense, so long as it's “ordinary and necessary,” for your industry. According to IRS Publication 535:
“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.”
This includes premiums for business insurance, workers comp, and employee health insurance. Also, if you’re self employed, you may be able to deduct a portion or all of your health insurance premiums.
Note: Not every type of business insurance premium can be written off as a business expense. If the insurance policy you want to write off isn’t deemed “ordinary and necessary,” then the IRS won’t allow you to to mark it as a business expense.
4. Qualified home office expenses
Due to COVID, many people are now working from home instead of the office. The good news is, if you’re self-employed, you can deduct a portion of your mortgage or rent, property taxes, utilities, and repairs and maintenance for areas of your property that have a business use. You can also deduct expenses, such as home office supplies. In most cases, employees are not able to take a business property or home office deduction.
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.
Whatever method you choose, per the IRS, you can only qualify for home office expense so long as you satisfy these requirements:
- Regular and exclusive use – You must regularly use that part of your home exclusively for business purposes.
- Principal place of business – You must demonstrate that your home is the primary place that you conduct your business from.
5. Business travel expenses
Do you travel regularly for work business trips that take you away from your home for a day or more? If so, you can deduct all travel expenses across the firm that are related to the performance of a specific, planned business purpose such as going to meetings or finding new clients. So long as it's a temporary work assignment outside of your “tax home,” and the expenses are considered ordinary and necessary, you can likely write them off.
According to the IRS, common travel expense write offs include:
- Travel by airplane, train, bus, or car between your home and your business destination.
- Fares for taxis, ride-hailing services, or other types of transportation between your transportation (airplane, train), accommodation (hotel or rental), 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
- Meals (50% deductible)
Because there are a variety of possible write-offs, it’s critical that you keep detailed and accurate travel records along with your receipts. Categorizing these things can be time consuming, so it’s ideal if you have an automated expense management system to assist with receipt matching, business expense categorization, and authentication.
6. Vehicle usage
Do you use your personal vehicle for business? Business owners or self-employed individuals can deduct car expenses on their tax return. But, if you use your vehicle for both business and personal reasons, expenses need to be split.
A vehicle tax deduction is based on the portion of the car mileage used for business purposes. These deductions can occur in one of two ways:
- Keeping track of all expenses, including: depreciation, lease payments, gas and oil, tires, repairs and tune-ups, insurance, and registration fees.
- Or by using the IRS standard mileage rate, which is 58¢ per mile.
7. Advertising and promotion
Did you invest in advertising and promotion for your business? If so, those costs can be 100% deductible. According to the Small Business Chronicle, “advertising and promotional costs are deductible because they are part of the cost of doing business, just as are items such as payroll, raw materials, leased commercial space and property taxes.”
What could be included in this? Activities like:
- Redesigning your website
- Hiring a person to design your logo
- 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
Business deals have often been closed over the course of a great meal. If you regularly conduct business with clients over lunch or dinner, this qualifies as a business-related activity and you can deduct 50% of the qualifying food and beverage costs (so long as it’s not lavish and an employee or owner is present at the meal).
Additionally, meals provided for employees are 50% deductible and those for parties or picnics are 100% deductible.
Ramp: Making taxes easier
Now that you know what you can write off, 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. That’s why it’s important to prepare your bookkeeping throughout the year.
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 and control your spend. It’s financial visibility and tax preparation in real-time—it’s Ramp.
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.