Top 10 small business deductions and tax expenses
As someone who is self-employed or owns a small business, filing your year-end taxes might feel a little overwhelming—especially if you have to cut a hefty payment to the government. But if you take advantage of a few business deductions and expenses, you can lower that bill (and your stress level).
From assets and liabilities to deciphering your books, your year-end filing requires plenty of preparation. Not to mention handing over an often-hefty check to the government when it’s over and done with.
However, there are a few things freelancers and SMBs can do to alleviate their tax burden.
While there are dozens of business deductions and expenses freelancers and entrepreneurs could qualify to use in their year-end filing, we’ve done the legwork to round up 10 of the most common deductions that could help save your business some serious cash.
1. Rent and utilities
Do you lease office space for your business? Regardless of whether it’s a desk in a co-working space or an entire commercial building, freelancers and entrepreneurs can claim business rent as a tax deduction.
The same goes for any utilities you pay for your office space—yes, the government cuts you some slack for keeping your lights on. This includes electricity, gas, telephone bills, and water bills.
2. Home office
For many of us freelancers, our homes pull double duty as both a residence and our workspace. Many freelancers and solopreneurs work from home, so their residence is technically also their place of business. Don’t fret—you can claim a portion of the cost of your home office as well.
According to Publication 587 (Business Use of Your Home), you can deduct a portion of expenses for your home office. But don’t confuse these basic costs of running a business with your personal rent and utilities. The two are completely separate deductions, so make sure you treat them as such in your paperwork.
Some of the typical costs you can include as part of business-use-of-home deductions are:
- Utilities (heat, electricity, water, Internet)
- Mortgage interest
- Property taxes
- Home insurance
Before you jump on this deduction, however, make sure your home office meets the basic criteria. According to the IRS, your home must meet these two basic requirements:
- Regular and exclusive use
- Principal place of your business
You can also lean on this IRS guide to use their simplified or regular method to calculate these costs.
3. Advertising expenses
Whether you’re a solopreneur or have a growing team, you likely spent some of your hard-earned dollars advertising your business last year. If so, those expenses could be deducted on your year-end filing.
Whether you spent your advertising budget last year on business cards, billboards, or anything in between, you can claim those expenses.
You can also claim:
- Promotional and branded swag (think keychains, pens, coffee mugs, tote bags)
- Website costs (hosting, design, maintenance)
- Online advertising (banner ads, Facebook ads and other paid social media ads)
Many entrepreneurs and freelancers have insurance policies to protect themselves, their business, and any equipment. And many of these expenses can be deducted on your filing.
- Liability insurance premiums
- Commercial property insurance costs
- Business interruption insurance
- Insurance on any equipment (other than vehicles, which is deducted as part of vehicle expenses).
5. Legal and professional fees
Did you seek advice from a lawyer to start up your business? Or did you rely on an accountant to file your taxes last year?
If so, you can likely claim those professional fees as a deduction on your year-end filing. You’re able to deduct the cost to consult external pros like lawyers and accountants, membership fees to professional organizations and even costs for business books, industry publications and online subscriptions.
6. Retirement plans
For those freelancers or self-employed workers contributing to personal retirement plans, you can likely deduct those payments.
Note that all accounts must be qualified retirement plans: that means you can deduct contributions to plans like SEP IRAs, SIMPLE IRAs, and 401(k)s.
7. Health insurance premiums
Staying fit and healthy can get pretty pricey—especially if you’re self-employed. That’s why freelancers and small business owners can deduct the costs of their health insurance premiums in some cases.
Those who own their own solopreneur business or own more than 2% of their S corporation also have some deduction options here.
If you’re self-employed, you can deduct the health care premium payments for yourself, your spouse, dependents, and any child under the age of 27.
8. Bad debts
No matter how hard you may try, many small businesses end up with a certain amount of “bad debts” each year. Essentially, bad debts are any liabilities you can’t collect on. For many self-employed workers and freelancers, that often means outstanding invoices your customers simply won’t pay.
Depending on whether you sell goods or services, bad debts you can claim include:
- Funds you’ve loaned to employees, vendors, or other businesses
- If your business sells goods, you may deduct the costs of unpaid purchases
- The same rule applies to businesses who sell services
9. Office supplies and tools
It takes innumerable supplies to keep an office functioning. As a small business owner or freelancer, you need certain tools to stay sharp and ready to work—think stationery, pens, notebooks, and the litany of other items found on your desk.
While many of these items are relatively inexpensive, these small costs can add up to some serious savings when used as a deduction on your year-end filing. Some of the more obvious (and not-so-obvious) supplies and tools you can include in this category are:
- Pens and pencils
- Staplers and paper clips
- Day-to-day shipping for products
- Courier expenses
- Cleaning supplies
10. Salaries and wages
As your business grows, you may want to bring on hired hands to run certain aspects of your biz. Not only do those employees and contractors provide a valuable service (i.e. their skills and work), but you can also deduct their gross salaries and wages.
If you’re a business with employees, you can deduct payroll taxes like:
- Employer contributions for social security and Medicare (FICA)
- Employer contributions for federal (FUTA) and state (SUTA) unemployment taxes
- Salaries and wages like:
- Bonuses and commissions
- Employee benefits (life insurance, education reimbursements)
- Per diems and allowances
- Contract wages for workers paid more than $600 in a year
Additional information on business deductions
As we mentioned before, these aren’t all the business deductions you can claim in your year-end tax filing. This list is just the tip of the iceberg when it comes to reducing your tax burden and making your accounting process easier.
Need a little more information to make sure you’re maximizing your claims? Check out the IRS guide to deducting small business expenses.
The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.