Spend an hour on social media watching videos about small business tax deductions and  you’re likely to walk away thinking your small business can get a tax-write off for anything: your home, car, meals, clothing, and all kinds of other expenses. 

Reality doesn’t always line up with the hype though, and in this case it can be very expensive to take bad advice. 

Tax write-offs can be very valuable to small businesses by reducing the total amount of tax you pay. But you need to understand how to use them correctly, and make sure you follow IRS requirements. 

Here we’ll provide an overview of how tax write-offs work for small business owners, and potential pitfalls to avoid. We’ll even share some specific examples of bad advice about tax deductions.

Warning:

Nav Technologies, Inc. does not provide legal, tax, financial or other advice. We recommend business owners consult their own experts and attorneys.

What Are Tax Write-Offs?

When you start a small business, one of the common pieces of advice you’ll hear is to maximize your tax deductions. 

But what does that really mean? 

Tax write-offs are qualified business expenses that reduce your total taxable income. 

For small business owners, these write-offs are an important way to lower your tax bill by reducing the amount of business income subject to taxes. 

When you claim legitimate business write-offs, you’re lowering the profits on which you need to pay state and/or federal income tax, which can result in substantial savings for your business.

Tax write-offs vs. deductions 

The terms “tax write-offs” and “deductions” are often used interchangeably. Both refer to business expenses that can be subtracted from your gross income (a.k.a. total income) to determine your taxable income. 

In either case, expenses must be both ordinary and necessary for your business operations to meet the minimum IRS requirements. 

Common Types of Tax Write-Offs for Small Businesses

Here are some common business expenses that may be tax deductible. Again, they must be ordinary and necessary for your business operations, so talk to your tax advisor to clarify which ones apply to your business. 

1. Office supplies 

The costs of running your day-to-day business operations include office supplies, whether that’s shipping boxes, printer ink or janitorial supplies for your office. These essential items are fully deductible in the year you purchase them if they’re used for your business. 

Tip: Consider purchasing office supplies through net-30 vendors that report to business credit. While it won’t affect tax deductions, these accounts can help establish business credit when paid on time. 

2. Home office deductions 

If you run your business from home, you may qualify for tax savings through the home office deduction. However, this deduction comes with strict requirements. 

You must use part of your home regularly and exclusively for business, and it must be your principal place of business or where you regularly meet clients.

The IRS offers two methods for calculating this deduction. The standard method allows you to deduct actual expenses based on the percentage of your home used for business. 

Alternatively, the simplified method lets you deduct $5 per square foot up to 300 square feet, with a maximum deduction of $1,500. This simplified option can save time and paperwork, though it might result in a smaller deduction than the standard method depending on your expenses. 

3. Travel and vehicle expenses 

Business-related travel expenses can add up quickly, but they’re generally deductible if they’re ordinary and necessary for your business. This may include transportation, lodging, and meals while traveling for business purposes. 

Warning: Keep in mind that regular commuting between your home and primary workplace isn’t deductible.

For vehicle expenses, you have two options for claiming deductions. You can use the standard mileage rate, which is 67 cents per mile in 2024, or track and deduct your actual vehicle expenses including gas, repairs, and insurance. 

4. Professional services 

Professional services that help you run your business are generally deductible. This includes fees paid to accountants, lawyers, tax professionals, and consultants. Even the cost of preparing your business tax returns qualifies as a deductible expense. If you use a bookkeeper or payroll service throughout the year, these expenses are also deductible. The key is that these services must be necessary for your business operations – not for personal matters.

5. Marketing and advertising 

Promoting your business is essential for growth, and fortunately, these expenses are tax-deductible. This includes traditional advertising, digital marketing, and promotional materials. Your website development and maintenance costs, social media advertising expenses, and even business cards are considered legitimate write-offs. If you hire a marketing consultant or advertising agency, these professional fees are also deductible. Just ensure the expenses are reasonable and directly related to promoting your business.

6. Internet and phone

Many entrepreneurs have a cell phone they use for both personal and business purposes. The general principle that applies here is that you may deduct those expenses for business use.

Here’s how the IRS describes it: 

“Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.”

7. Employee salaries and benefits 

When you have employees, their compensation package often represents one of your largest business expenses. You can deduct employee salaries, wages, bonuses, and commissions. But keep in mind that this compensation must be:

 ○ Reasonable: The pay must be reasonable for the services performed.

○ For Services Performed: The pay must be for actual services rendered.

Beyond basic compensation, you may be able to write off various employee benefits. This includes contributions to employee health insurance premiums, retirement plans, and life insurance coverage. 

Additionally, the employer’s share of payroll taxes, including Social Security, Medicare, and unemployment taxes, is deductible as a business expense.

What if you are the owner and employee of your business? Learn more how to pay yourself as a business owner here. 

8. Business insurance 

Insurance is a necessary expense for protecting your business, and many types of business insurance premiums can be tax-deductible.

This may include liability insurance to protect against lawsuits, property insurance for your business assets, and professional liability insurance if you provide services. Workers’ compensation insurance required by state law is also deductible. Note that paying for an insurance premium for more than 12 months in advance can affect deductibility.

There are exceptions, of course, For example: business owners will sometimes get a life insurance policy to pay off a small business loan if the business owner or another key person dies. Those insurance premiums generally aren’t deductible, according to the IRS.

9. Education and training 

Investing in your business knowledge and skills through education and training can lead to valuable tax deductions. The key requirement is that the education must maintain or improve skills needed in your current business – it can’t qualify you for a new career. Courses that enhance your expertise, relevant certifications, and subscriptions to professional publications all qualify as legitimate write-offs. You can also deduct the cost of training your employees to improve their job skills.

10. Equipment

Under Section 179, you may be able to deduct the full cost of qualifying equipment in the year you buy it, rather than depreciate it over several years. This may include everything from basic supplies to larger equipment purchases that help you run your business. The maximum section 179 expense deduction for sport utility vehicles placed in service in tax years beginning in 2024 is $30,500.

11. Loan interest

You may be able to deduct interest on a small business loan or credit card that you use exclusively for business purposes if you are legally liable for the debt, both you and the lender intend that the debt be repaid and you and the lender have a true debtor-creditor relationship. However, some taxpayers must limit their business interest expense deduction so don’t let this be the sole reason

Pro tip: Consider using a business credit card for your business purchases. You may be able to deduct the annual fee and any interest charges. (Check with your tax pro.)

12. Health insurance and HSA deductions 

Self-employed business owners may be able to deduct health insurance premiums for themselves, their spouse, and their dependents. This includes premiums for medical, dental, and qualified long-term care insurance. Additionally, contributions to a Health Savings Account (HSA) can provide a valuable tax break. 

Special rules apply; for example, you cannot be eligible for health coverage through your spouse’s employer. This tax deduction can get complicated, so review the details in the insurance chapter of IRS publication 535 or discuss it with your tax professional. 

13. Retirement plan contributions 

As a sole proprietor or small business owner, contributions to retirement plans like a Simplified Employee Pension (SEP) IRA or individual 401(k) are generally tax-deductible. The deduction amount varies based on your business income and the type of plan. 

14. Self-employment tax deductions 

When you’re self-employed, you’re responsible for both the employer and employee portions of Social Security and Medicare taxes. However, the IRS allows you to deduct half of your self-employment tax on your personal tax return. This deduction helps offset the additional tax burden of being your own employer. Report this deduction on your individual tax return, even though it relates to your business income.

How to Maximize Your Tax Write-Offs

Here are some tips for taxpayers looking to maximize business deductions. 

Keep accurate records 

Not keeping good records is one of the top tax mistakes business owners make. 

Good record keeping is essential for taking full advantage of business tax deductions. Save receipts, invoices, and documentation for all business expenses throughout the year. Digital tools like accounting software or receipt-scanning apps can help organize your records so you’re not scrambling at the last minute. . 

Beyond just keeping receipts, though, make notes about business purposes for expenses, especially for things like business meals or travel. If the IRS ever questions a deduction, having clear records will help substantiate your claims.

Consult a tax professional 

While many business owners handle their own bookkeeping, working with a tax professional such as a CPA, Enrolled Agent (EA), or other tax professional can help you find additional legitimate deductions you might miss. 

A qualified tax advisor understands complex tax regulations and stays current with tax law changes. They can help ensure you’re claiming all eligible deductions while avoiding mistakes that could trigger an audit.

What Qualifies as a Tax Write-Off?

If you’re hoping to get a straightforward and comprehensive list of every single business expense and whether it qualifies as a tax-write off, you may be disappointed. 

The IRS does provide lots of guidance; you can find a lot of it at the IRS business taxes information hub. 

When it’s not clear, or when taxpayers try to take questionable deductions, those questions can end up in Tax Court. 

Tax attorney Jasmine DiLucci, JD, CPA, explains how tax law works in one of her Youtube videos: “At the top we have statutes, the Internal Revenue Code, and while it is at the top, it usually contains a very small percentage of the details. That’s why almost every illegal tax shelter and tax guru’s social post is borne out of statute because it ignores the majority of the tax law and detailed interpretation by Treasury and Tax Court judges whose opinions on the statutes are the only ones that matter. And what happens over time is that we have enough court cases that we have very established law in the area.”

Ordinary and necessary business expenses 

Again the IRS says that for an expense to qualify for a tax deduction, it must be both ordinary and necessary for your type of business. “Ordinary” means it’s common and accepted in your industry. 

“Necessary” means it’s helpful and appropriate for your business – it doesn’t have to be indispensable. 

“We don’t get to decide what’s ‘ordinary and necessary’,” says Dilucci in another one of her Youtube videos explaining ordinary and necessary expenses. “It’s very much specific to tax law and case law and statute…” 

Expenses that don’t qualify 

Not every business-related expense qualifies as a tax write-off. Personal expenses, even if they’re somewhat related to your business, generally aren’t deductible, for example. If you use something for both business and personal purposes, you can only deduct the portion that applies to business use. 

Capital expenses – major purchases that will benefit your business for more than one year – typically can’t be fully deducted in the year you buy them. Instead, these costs are usually depreciated over several years.

How Tax Write-Offs Benefit Small Businesses

Ultimately the goal of taking personal or business tax deductions is to pay less tax and to be able to invest more money into your business. 

Lowering your taxable income 

Tax write-offs directly reduce your taxable income, not your tax bill. For example, if your business earns $100,000 and you have $20,000 in qualified tax deductions, you’ll only pay taxes on $80,000. This can result in significant savings, particularly if you’re diligent about tracking and claiming all eligible expenses throughout the year.

The majority of small businesses are what’s referred to as “pass through” entities, which means profits flow through to the owner’s personal tax return. 

Most sole proprietors, for example, report their business income and allowable deductions on Schedule C which they file with their personal income tax return. 

Improving cash flow 

Understanding and properly using tax write-offs can improve your business’s cash flow in two ways. 

First, you can plan major purchases and expenses strategically, timing them to maximize their tax benefit. 

Second, by reducing your tax liability, you’ll have more money available to reinvest in your business or save for future expenses.

Of course, every business expense still costs money, so spend thoughtfully! 

Also keep in mind that a business that reports little to no profit may make it harder to qualify for certain small business loans, and may even create problems when trying to get a mortgage.

Common Myths About Tax Write-Offs

Again, you have to be very careful about getting bad tax advice. The IRS warns that “social media can routinely circulate inaccurate or misleading tax information, where people on TikTok and other social media platforms share wildly inaccurate tax advice.” 

For example, the IRS warned about a non-existent “Self Employment Tax Credit” promoted widely on social media. (Read the IRS Dirty Dozen for an annual list of the worst tax scams and get tax advice from reputable sources.)

A couple of red flags to watch out for:

Everything Is deductible

A common misconception among new business owners is that every business-related purchase qualifies as a tax write-off. This just  isn’t true, and be skeptical of anyone who tries to say otherwise. 

Want to see a couple of real life examples? Watch DiLucci debunk bad tax advice in these videos:

Content Creators Write off Everything Used in Videos?

Can You REALLY Write off Daily Meals?

More write-offs mean no taxes

Some business owners mistakenly believe that if they have enough write-offs, they won’t have to pay any taxes. This is a misunderstanding of how tax deductions work. 

Write-offs reduce your taxable income, not your tax bill directly. For example, a $1,000 deduction may reduce your income by $1000 (if it’s fully deductible in the current tax year), and you’ll then pay taxes on your remaining taxable income at the applicable tax rate. 

And, of course, questionable deductions can trigger an IRS audit. The goal should be to take all legitimate deductions you’re entitled to, not to cheat the system. 

Key Takeaways: Understanding and Using Tax Write-Offs 

Successfully managing your business tax write-offs requires ongoing attention throughout the year, not just at tax time. Keep detailed records of all business expenses and understand which ones qualify for deductions. 

When in doubt about whether an expense qualifies, consult with a qualified tax professional. 

Remember that while tax write-offs are valuable tools for reducing your business’s tax liability, they’re just one part of a comprehensive tax and financial strategy. Make business decisions based on what’s best for your business.