Common Business Deductions

As a small business owner, independent contractor, or freelancer, you can take advantage of several common business deductions to lower your taxable income. Here are some deductions you may qualify for:

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December 17, 2024

Business Startup Costs

Startup costs, such as researching or creating a new business, are immediately deductible up to $5,000. Moreover, organizational costs, like forming a corporation or partnership, are also deductible up to $5,000. Essentially, these are potential $10,000 costs that can further lower your taxable income. Costs exceeding $50,000 reduce the deduction amount. Any remaining costs are amortized over time.

Legal and Professional Fees

Fees for legal, accounting, bookkeeping, or tax preparation services that are directly related to your business are fully deductible. Furthermore, these include fees paid to insurance brokers or advertising agencies.

Accounting software

In addition to deducting fees for bookkeeping, accounting software is a common business deduction. Typically, this type of software is a monthly subscription, resulting in a potential substantial deduction.

Office Expenses

Home office deduction

If you use part of your home for business purposes regularly and exclusively, you may claim a home office deduction. The IRS offers two methods:

Simplified Method: Deduct $5 per square foot, up to 300 square feet.
Actual Expenses: Deduct mortgage interest, rent, real estate taxes, and other expenses based on the percentage of your home used for business.

Usually, the simplified method is easier to use, but consulting a tax professional, like DuPage Tax Solutions, can help determine which option offers the greatest benefit.

Office supplies and furniture

Office Supplies: Items like pens, paper, and folders are fully deductible.
Office Furniture: This includes items such as desks, chairs, and tables. Also typically 100% deductible.

Advertising Deduction

Advertising is usually a big tax break for business owners. Essentially, advertising expenses, including social media ads, website creation, business cards, brochures, and event sponsorships, are fully deductible. Ultimately, expenses directly connected to promoting your business can qualify as deductible advertising costs.

Rent Deduction

You can deduct rent paid for office space, retail space, or equipment used for your business. However, rent for your home is not deductible unless it qualifies under the home office deduction.

Insurance Deduction

Premiums for business insurance, including property, malpractice, and health insurance, are deductible. Additionally, your business may qualify for the Small Business Health Care Tax Credit, which can cover up to 50% of your employees’ health insurance premiums (35% for nonprofits).

Interest on Loans

Interest paid on business-related loans is deductible if the loan is from a traditional lender and you are legally responsible for the debt. This includes interest on car loans used for business and general business loans. However, loan principal payments are not deductible.

Asset Deductions

For assets like equipment and machinery, the tax law allows you to potentially accelerate or immediately deduct these assets instead of depreciating them over time.

Keep in mind these provisions:

Bonus Depreciation: Depreciate 60% of the asset’s cost in the first year it is placed in service for 2024. The deduction phases out 20% each year until it completely phases out in 2027.
Section 179 Deduction: Deduct up to $1,220,000 for qualifying property placed in service during the tax year for 2024.
De Minimis Safe Harbor Election: Deduct assets costing $2,500 or less immediately.

Vehicle Use

If you use a vehicle exclusively for business, all related expenses are deductible. Also, for mixed use, only business-related costs qualify. The IRS allows two methods:

Standard Mileage Rate: For 2024, the rate is 67 cents per mile.
Actual Expenses: Deduct costs like repairs, insurance, and fuel, multiplied by the percentage of miles driven for business.

Learn more about car expenses

Phone and Internet Deduction

Expenses for phones and internet used exclusively for business are fully deductible. However, for mixed-use devices, only the business-use portion qualifies for the deduction.

Meals

Finally, meals are another common business deduction. Generally, the IRS allows a 50% deduction for business meals, provided the expense is:

Ordinary and Necessary: The meal must be common and helpful for your business.
Directly Related to Business: The meal must occur during a business meeting or be associated with active business discussions.

Keep detailed records, including receipts and the purpose of the meal, to substantiate your deductions.

References

Publication 535 (2023), Business Expenses | Internal Revenue Service. https://www.irs.gov/publications/p334

“The Small Business Health Care Tax Credit.” HealthCare.Gov, www.healthcare.gov/small-businesses/provide-shop-coverage/small-business-tax-credits/