What Deductions You Might be Missing for Your Business

Business owners have significant flexibility with tax deductions, offering numerous tax advantages depending on their specific line of business. It's crucial to stay informed and proactive in identifying these opportunities to maximize your tax benefits.

If you have dedicated bank and credit card accounts that you use for your business, it is easy for your CPA or accountant to capture all your expenses. Your tax professional will start with your bank and credit card balances at the beginning of the year, classify all the activity that took place in the accounts during the year, and tie the book balance to the bank and credit card statement balances at the end of the year. For the book and bank balances to tie, every transaction must be accounted for.

This becomes more difficult if your personal and business funds are commingled. Many businesses in the early stages, or side businesses, comingle funds. If your business is an S-Corp or LLC, the commingling of funds can lead to future tax and legal problems. If you have chosen one of these entity types, you should make it a point to open dedicated business accounts if you have not done so already.

If you have been commingling business and personal funds, you may be missing some common deductions that can reduce your tax bill. By making sure you keep up with these business expenses, you will not only reduce your income tax, but you will likely reduce your self-employment tax as well.

One easy way to look for missing deductions is to look at the tax form. Many Sole Proprietorships and LLC’s will report their income and expense on Schedule C of Form 1040. If you made an S-election, you will use Form 1120-S, and if you have a partner, or partners, but have not made an S-election, you will use Form 1065. Although the forms do not list all the common deductions, they can give you an idea of things that you may be missing. A deduction does not have to be listed on the form to be deductible. Unless specifically excluded by law, an expense that is ordinary and necessary for your business is deductible. If, when preparing your return, you don’t find a place on the form to put your deduction, it will usually be reported in the aggregate under other deductions, and then in detail on an itemized list in the statements included in the tax return.

Below are some common business expenses that you should be deducting. Although these expenses are deductible to the entity types listed above, the accounting and reporting of these deductions may vary by entity type.

Home Office Deduction

If you use a part of your home exclusively for business, you can deduct related expenses. This includes a portion of your mortgage interest or rent, utilities, and insurance. The key is that the space must be used regularly and exclusively for business purposes. You can choose to allocate a portion of the actual cost to the home office or use the simplified method. The simplified method allows you to take a $5 deduction per square foot of office space up to 300 square feet. Your home office expenses are only deductible only to the extent you have net income on Schedule C and cannot create a loss. If a loss does occur the deduction can be carried forward to future years.

Utilities and Internet

A portion of your home’s utilities, internet, and phone bills can be deducted if they are used for business purposes. You should calculate the percentage used for business to accurately claim these expenses.

Vehicle Expenses

If you use your vehicle for business, you can choose between deducting the standard mileage rate or actual vehicle expenses like gas, repairs, and depreciation. Keep detailed records of your business mileage and expenses to determine which method benefits you more. Here is more information about deducting auto expenses for your business. 

Education and Training

Attending courses, seminars, and certifications to maintain or improve skills required to operate your business are deductible. These enhance your expertise, reduce your taxable income and may be required in your industry or profession. Travel related to these expenses is also deductible.

Professional Services

Fees paid to accountants, lawyers, consultants, and other professionals for business-related services are fully deductible. These services are essential for running your business efficiently and complying with regulations. If you paid a tax preparer to prepare your individual 1040 and reported business income on Schedule C, your tax preparer can allocate a portion of the preparation fee to Schedule C. If the tax preparer provided bookkeeping services for the business, 100% of the bookkeeping fee is deductible on Schedule C.

Advertising and Marketing

Promoting your business through ads, business cards, websites, and other promotional materials is deductible. This includes online ads, social media promotions, and traditional advertising methods.

Office Supplies and Equipment

Paper, pens, computers, printers and all other supplies and equipment used for your business are deductible. These are essential for day-to-day operations and can add up over time. Most small businesses that purchase tangible personal property can make a safe harbor election and immediately expense items costing up to $2,500 per item or invoice. Items costing more than $2,500 are required to be capitalized and depreciated. Section 179 and Bonus Depreciation may be available to depreciate these higher priced items more quickly, which can be very beneficial for tax purposes.

Travel Expenses

Business travel costs, including airfare, hotels, meals, and other travel-related expenses, are deductible. Ensure you keep all receipts and document the business purpose of each trip.

Meals and Entertainment

Business meals with clients and employees are partially deductible. You should keep a log of the client or employee and business purpose for the meal. Although entertainment expenses have been deductible in the past, these expenses are not deductible under law as of 2024.

Business Insurance

Premiums for business insurance policies, such as liability insurance, are deductible.

Bank Fees

Bank fees for business accounts, including overdraft fees, wire transfer fees, and credit card processing fees, are deductible. These small fees add up over time and will reduce your tax bill.

Interest on Business Loans

Interest paid on business loans, credit cards used for business, or business lines of credit is deductible.

Depreciation

Depreciation on business assets like equipment, furniture, and buildings is deductible over time. This allows you to spread the cost of an asset over its useful life. Most small businesses that purchase tangible personal property can make a safe harbor election and immediately expense items costing up to $2,500 per item or invoice. Items costing more than $2,500 are required to be capitalized and depreciated. Section 179 and Bonus Depreciation may be available to depreciate these higher priced items more quickly.

Health Insurance Premiums

If you are self-employed, you can deduct the cost of health insurance premiums for yourself and your family. If you are an S-Corp shareholder, the amount paid for shareholder health insurance must be reported as income in your W-2, but this amount can then be deducted on Form 1040.

Retirement Contributions

Contributions to a SEP-IRA, SIMPLE IRA, or other qualified retirement plans are deductible and help you save for retirement.

Startup Costs

Up to $5,000 in startup costs can be deducted in the first year, with any remaining costs amortized over 15 years. This includes expenses incurred before you officially start your business.

Rent and Lease Costs

Rent paid for office space, equipment, and other business-related leases is deductible.

Employee Salaries and Benefits

Wages, bonuses, and benefits paid to employees are deductible. This includes health insurance, retirement contributions, and other employee benefits.

Contract Labor

If you pay someone to provide outside services to your business, these expenses are deductible. Be sure to issue a 1099 to anyone you pay more than $600. However, a 1099 is not required to be issued to corporations.

Software and Subscriptions

The cost of software, online services and apps used for your business are deductible. This includes accounting software, project management tools, and other business-related subscriptions.

Other Items

To be deductible, a business expense must be both ordinary and necessary. 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 critical to the business's survival to be deductible, it just needs to be common and necessary in your industry. If an expense is ordinary and necessary and not otherwise excluded by law, you should initially consider it deductible. Your tax professional can make the final determination when preparing your return.

Conclusion

Capturing all possible deductions for your business is crucial for minimizing your tax liability. You are allowed by law, and should deduct your business expenses, but following the letter of law and doing everything right will not necessarily protect you from an audit. The IRS selects returns for audit for many reasons, including random selection. Keep detailed records and receipts for all business expenses, as they provide essential support for your deductions. In the event of an audit, you will have nothing to fear, and can feel confident in your tax return. By being thorough and diligent, you can ensure you’re maximizing your deductions, limiting your tax, and optimizing your business’s financial health all while complying with the law.