How to maximize small business tax deductions for financial growth

Who doesn’t wince at the thought of handing over a chunk of their hard-earned revenue to taxes? Operating a small business sustainably – and trying to scale it – is already a tough challenge. Hefty tax bills don’t make it any easier!

Thankfully there are countless small business tax deductions available, tailor-made for the self-employed. Leveraging these deductions ensures more of your earnings stay right where it belongs—in your business.

So, let’s dive into the world of small business tax deductions and explore some of the best ways to maximize your financial growth while minimizing your tax burden.

What are tax deductions?

A tax deduction, synonymous with tax write-offs, is a legally permissible subtraction from one’s income designed to pare down the taxable income and, by extension, the total tax liability.

Say you’ve made $70,000 this year, and through allowable deductions, you bring your taxable income down to $50,000. Then, you’d only be taxed on that $50,000 instead of the entire $70,000.

Generally, to qualify for such write-offs, your business expenditures must meet your local tax governing body’s criteria of being “ordinary” and “necessary.” Translation: they’ve got to be common and crucial for your line of work.

For instance, purchasing a camera is a plausible expense for a photographer’s business, but a software agency wouldn’t get much mileage from the same spending.

Top 18 small business tax deductions

You’d be surprised by the number of deductions many business owners miss out on. Here are 18 small business tax deductions that often fly under the radar:

1. Home office deductions
2. Advertising and marketing
3. Professional service fees
4. Work-related travel costs
5. Auto expenses
6. Business insurance
7. Office supplies
8. Office furniture
9. Educational expenses
10. Internet and phone bills
11. Employee wages and benefits
12. Rent for business space
13. Depreciation of business assets
14. Meals and entertainment
15. Business loan interest
16. Licenses and permits
17. Subscriptions to trade publications or business software
18. Moving expenses

Let’s look at each of these tax deductions in detail.

1. Home office deduction

For enterprises operated from the comfort of one’s abode, a sweet relief comes in the form of a home office deduction. Most tax codes allow a specific portion of your home rent/mortgage, utilities, and other related expenses to be written off if you run the business from there.

But to be eligible for the home office deduction, your workspace must conform to the following prerequisites:

• “Regular and exclusive use.” The business space must be dedicated solely to conducting business activities. A room serving dual purposes, such as your kid’s playroom or guest room doubling up as office space on occasion, generally disqualifies one from the deduction.
• “Regular workspace.” The workspace should be the primary location where one conducts their work. For instance, if you ordinarily operate from a co-working space and only occasionally resort to the kitchen table, claiming the deduction would likely not be permissible.
• “Significant business engagement.” The home office should be a hub for regular and substantive business activities. To illustrate, a medical provider primarily offering patient care in a hospital but conducting paperwork and billing at home would likely be ineligible.

2. Advertising and marketing

You have to get the word out there about your business. Whether you’re investing in SEO, splurging on business cards, or bathing the town in billboards, hang onto those receipts – they’ll be worth it come tax season. And don’t forget, any fees paid to marketing consultants or agencies can also be accounted for here.

To cut marketing costs, you can leverage organic growth strategies such as content marketing, SEO, and word-of-mouth referrals. Using an AI content generator can save costs on marketing campaigns by producing high-quality content without the need for additional manpower. Continuously analyze performance metrics and adjust strategies based on data-driven insights.

3. Professional service fees

Costs incurred from hiring attorneys, accountants, and other business consultants can also be deducted from taxable income. However, this applies only when the services sought are related to your business.

4. Work-related travel costs

Business trips can be a slog, but they are crucial for networking and drumming up new clients or business deals. At least there’s consolation in knowing that you can write off some of your travel expenses!

To be classified as ‘travel’ for business expense purposes, your journey must take you away from the city or area where you normally conduct business. Plus, you should be away for longer than one workday. The kinds of travel expenses that are deductible include airfare, accommodation, car rentals, and in some places, daily food quotas.

5. Auto expenditures

Many businesses require driving, whether for making deliveries, attending business meetings, or traveling to job sites. If you can conclusively prove that your automobile serves a business purpose, you can deduct those expenses from your tax return. Here are two ways to calculate your vehicle expenses:

• Go by the mile. Some tax governing entities calculate a standardized rate for business-related miles driven, which changes annually. Simply total up the miles you’ve driven for business activities and multiply them by their standard deduction rate.
• Crunch the numbers. This approach might require a bit more effort. If you’re meticulous about keeping records, tally up your car’s depreciation value and your expenditures on gas, repairs, tires, tune-ups, insurance, and registration fees. The cumulative total of these will be your deduction, superseding the mileage.

6. Business insurance

Insurance is an essential commodity, and, fortunately, a deductible one! Any insurance premiums paid on a policy that covers your business, products, or employees can be deducted from taxable income. Some qualifying insurance policies include property insurance, liability coverage, malpractice insurance, and business interruption insurance. Make sure to learn how business insurance works before buying one.

7. Office supplies

Now, whether your small empire is stationed at home or in a high-rise building, you business must have necessary equipment, gadgets, and stationery.

The tax authorities, being the pragmatic institution they are, acknowledge this and allow you to write off up to 100% of the purchase cost of supplies used for your business operations. So don’t forget to keep those receipts from your latest office supplies run.

8. Office furniture

Investments in quality office furniture aimed at improving productivity and ambiance of your workspace can also be counted as a small business tax deduction. It includes chairs, desks, filing cabinets, and other necessary furniture for your home office or physical workspace.

9. Educational expenses

Continuous learning and development are the forces that drive innovation in business. Most tax bodies support this endeavor by allowing deductions for educational expenses that maintain or improve skills required in your business or trade. This includes conferences, workshops, and even online courses that enhance your knowledge and expertise in a relevant field for your business operations.

10. Internet and phone bills

Your internet and phone bills are crucial operational costs and, hence, are deductible. This includes cell phone plans, Internet service fees, and even software subscriptions necessary for everyday business operations.

The catch? You can only claim a deduction for the percentage of use solely dedicated to your business. So, ensure you delineate personal and business use accurately by keeping diligent records to validate the business necessity of these services.

11. Employee wages and benefits

When you hire employees, the wages and benefits you provide can be deducted as business expenses. This includes salaries, wages, and bonuses paid to your staff. In addition, any benefits like health insurance and retirement plan contributions are deductible as well. It’s important to keep proper records to prove that the payments were made for business purposes.

12. Rent for business space

If you rent office space, warehouse, or any facility used for business purposes, those rent payments are eligible for deductions. This also applies to co-working spaces or shared office arrangements. However, if you’re renting both personal and business space within a property (like renting out part of your home for business use), you need to accurately determine what portion of your rent applies to business operations and claim only that portion.

13. Depreciation of business assets

Business assets such as equipment, machinery, and furniture lose value over time. Depreciation allows you to write off a portion of the asset’s value each year for tax purposes. The IRS offers various depreciation methods (like straight-line or accelerated depreciation) to calculate how much of your asset’s value can be deducted annually. It's essential to track the life cycle of these assets properly to maximize your deduction.

14. Meals and entertainment

When you entertain clients, potential partners, or employees, the expenses associated with meals and entertainment can often be deducted. However, only 50% of the cost of meals is generally deductible, and it must be directly related to business activities. Business meals need to have a clear business purpose, such as discussing deals or negotiating contracts, so keep detailed records of the attendees and the nature of the meeting.

15. Business loan interest

If you’ve taken out a business loan to fund operations, the interest paid on that loan can be deducted from your taxable income. This also applies to interest on credit lines or business credit cards used for business purposes. However, if some funds from the loan were used for personal expenses, you’ll need to separate the business-related portion to ensure you're only claiming deductions for business expenses.

16. Licenses and permits

To operate legally, businesses often need specific licenses or permits (such as professional licenses, health permits, or zoning permits). The fees associated with acquiring and renewing these licenses and permits are fully deductible as business expenses. Make sure to save receipts for any required governmental fees or certifications to include them in your tax filing.

17. Subscriptions to trade publications or business software

If you subscribe to industry-specific publications or business software, these expenses are deductible. Whether it’s an online service for project management, a database tool, or an annual subscription to a trade journal, these subscriptions are necessary to maintain your operations and keep you informed about industry trends. Keep track of subscription costs and make sure they directly contribute to your business.

18. Moving expenses

If you relocate your business to a new location, certain moving expenses are deductible, provided the move is closely related to your business activities. While moving costs related to personal moves are no longer deductible for most individuals, business owners may still deduct the costs associated with moving business property, including expenses for transporting equipment or inventory. You may also be able to deduct costs related to moving employees if necessary for business operations.

Personal tax deductions for business owners

Charitable contributions

Charitable contributions made by individuals or small businesses may be eligible for tax deductions if they are given to approved nonprofit or charitable organizations. These deductions typically require proper documentation, such as receipts or written acknowledgments, and may be subject to limits based on income or business revenue. Donations made in the form of money, goods, or sponsorships that support community efforts or public benefit initiatives can often qualify, though the specific rules about what counts as a deductible donation and how much can be claimed vary depending on local tax laws.

Child and dependent care expenses

Expenses related to the care of children or dependent adults can often be deducted or used to claim tax credits, especially when the care enables the taxpayer to work or run a business. Qualifying expenses may include daycare, after-school programs, babysitting, or elder care services, as long as the care is necessary for maintaining employment or self-employment. The types of allowable expenses, as well as the percentage or amount that can be deducted, differ by region, and some systems also offer direct subsidies or tax relief based on income level or family circumstances.

Retirement contributions

In the USA, small business owners and self-employed individuals can deduct contributions to retirement plans like SEP IRAs, SIMPLE IRAs, and Solo 401(k)s, significantly lowering their taxable income. These plans offer flexible contribution limits and tax-deferred growth.

In Europe, while there is no unified system, many countries allow deductions for contributions to private or occupational pension schemes. For example, the UK and Germany offer tax relief for certain retirement contributions, though the rules, limits, and eligible plans vary by country.

Health care expenses

In the USA, self-employed individuals and small business owners may deduct a variety of health care expenses, including insurance premiums, out-of-pocket medical costs, dental care, and even long-term care services, provided they are not reimbursed and meet IRS requirements. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) also offer tax advantages when used for qualified medical expenses.

In Europe, most countries have universal or statutory health care systems where basic care is funded through taxation or mandatory insurance, limiting the need for out-of-pocket spending. However, in some countries like Germany or France, supplementary private insurance and certain medical costs—such as specialist visits, prescription co-pays, or private treatments—may be tax-deductible for self-employed individuals, depending on national tax laws.

Maximize small business tax deductions

Knowing the various expenses that qualify as tax deductions is only half the battle when it comes to discovering the available benefits for your small business. Here are 4 basic steps to ensure you’re optimizing every available deduction:

1. Check tax deductions in your area
2. Keep careful records
3. Seek expert advice
4. Plan ahead!

1. Check tax deductions in your area

The convoluted world of tax codes is continually evolving, and keeping abreast of these changes is crucial. Check your local government’s tax-related publications and check online resources to stay current about amendments, new credits, and deductions applicable to your business. Because the more you know, the better equipped you are to make strategic decisions in favor of your financial fitness.

2. Keep careful records

The road to maximizing small business tax deductions starts with impeccable record-keeping. Tax authorities love a well-documented paper trail, making it imperative to chronicle every transaction, no matter how minuscule.

3. Seek expert advice

Despite the wealth of available tools and resources, the complexities surrounding tax deductions often necessitate the insights of a professional tax advisor. A certified public accountant (CPA) or tax attorney can guide you to identify potential deductions that were previously off your radar and ensure you’re taking advantage of all available options.

4. Plan ahead!

Last-minute scrambles before tax season are seldom conducive to optimal outcomes. Instead, make tax planning an ongoing affair and consult with your tax advisor throughout the year to strategize on how to minimize your tax liability.

Tools to help you save on taxes

Many entrepreneurs find themselves in the chaos of crumpled receipts and fading invoices when the year-end tax battle arrives. When that happens, those sweet, sweet tax deductions could just slip right by you.

Fortunately, there are many tools available to help you stay organized and maximize the deductions from your small business. Below are some of the best tools that can help you get started:

Xero

Small business owners whose bookkeeping DIY attempts usually result in more headaches than savings can find solace in Xero. It’s a sleek, user-friendly platform where your expenses and deductions can be tracked in real-time, simplifying the annual hunt for tax write-offs.

It also enables automatic bank feeds and third-party app integrations, including a Xero and Quaderno integration to further enhance the accuracy of your tax filings.

FileCenter

For the old-school souls who like their receipts tangible and their files in literal folders, FileCenter provides the perfect solution. It’s an enterprise-level document management system that will help you scan and organize all your small business’s hard-copy bills, invoices, and even those occasional restaurant receipts.

This software also supports OCR text recognition, so you can convert your financial paper trail into a searchable digital database, optimizing the access and retrieval of your documents.

Resource Guru

Balancing the books isn’t the only aspect of tax deductions you’ll need to watch out for. Resource and time tracking is equally essential, especially for those businesses that work with contractors or have a varied team of employees.

Resource Guru is a robust scheduling and resource management tool that helps small businesses and online agencies schedule their resources effectively, optimize productivity, and manage time efficiently. But it also doubles up as a tool to track employee benefits, contractor salaries, professional services, and other deduction-relevant details, ensuring you are well-informed and well-armed when filing your taxes.

CoinLedger

If you have clients that have dabbled with cryptocurrencies or NFTs over the years, a tax software like CoinLedger can help quickly calculate gains, losses, and income for your client’s crypto taxes.

You can also find ample opportunities for tax write offs if your client is running a crypto-related business such as electricity costs, computer equipment, and exchange fees.

Next steps in growing your business

As you delve deeper into the world of tax write-offs, credits, and deductions, the path to financial growth becomes clearer. You can learn about other tax tips for small business owners. Other key elements of scaling your business are using the right accounting practices and measuring the top financial metrics.

Of course, to run a growing business smoothly – and save yourself time and headache – you should automate as many processes as possible. We’ve put together a list of 7 tasks an online business should automate, designed to increase your sales and financial prospects. Choosing the right payment method for your business can also be an important aspect when your business takes off and payments begin to come flooding in.

Finally, you might want to consider how to manage the other types of taxes that affect your business: consumption taxes, such as US sales tax, VAT, and GST. Keeping your growing business compliant with these tax rules can be tricky.

Quaderno is a tax compliance software for businesses who want to scale without memorizing all the tax policies at home or abroad. From sales tax calculation and automatic invoices, to registration alerts and comprehensive tax reports, Quaderno automates the tax compliance process for US sales tax, VAT, and GST around the world.

See how simple it could be with our free trial.

Thanks to Yoshiro Kichiro for sharing his expertise and writing this article for us!