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If you own a small business, one of the easiest ways to boost your profits is to make sure you are taking all the deductions you are entitled to on your tax return.Doing so can lower your taxable income and allow you to hold on to more working capital for your business. But not only is U.S tax code for small businesses fairly complicated but also some breaks that were available due to COVID-19 may be phased out by tax year 2022. It’s important to get up to date on these changes.The good news is that there are several new tax credits available if you make your business facilities more energy efficient or purchase an electric vehicle to be used for business.Read on to learn the latest.Recommended: 5 Small Business Tax Tips for Business Owners
What Are Small Business Tax Deductions?Small business tax deductions (or write-offs) are business-related expenses that you can subtract from your taxable income. According to the IRS, business expenses must be both ordinary and necessary to be considered deductible. An expense is “ordinary” if it’s common and accepted in your trade or business. An expense is “necessary” if it’s helpful and appropriate to your business. An expense generally doesn’t have to be indispensable, however, in order to be considered necessary. Many types of qualified business expenses are specifically addressed on the tax return, with a line to enter the deductible amount. Other qualified expenses can be listed separately.
How Do Small Business Tax Deductions Work?Virtually all businesses have to file a tax return, but how much you'll pay in taxes generally depends on how much your business has earned after qualified expenses have been deducted. A small business tax deduction is an expense that you can deduct from your income to reduce your federal and state tax bill. If your business brought in $150,000 in revenue, for example, but you had $50,000 in tax deductible business expenses, you would then only be taxed on $100,000 of revenue, which could save you many thousands of dollars compared to what you’d owe on $150,000.A 100 percent tax deduction is a business expense of which you can claim the entire cost on your income taxes. In some cases, however, you may only be able to claim a portion of the expense on your tax return.Recommended: How Long to Keep Business Tax Records
Changes in Covid Deductions for Small BusinessesThere are at least two tax credits that were available to cover tax years 2020 and 2021 that are either being phased out or are no longer available.
Employee Retention CreditOne of the most significant tax credits for small businesses was the Employee Retention Credit. It was a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021. Eligible employers could claim the ERC on an original or adjusted employment tax return for a period within those dates.While the year 2022 is not covered for this credit, business owners may be able to amend their 2020 and 2021 returns to claim the ERTC. It is usually possible to amend tax returns within three years after filing the return.
Delay of Payroll TaxesThis tax break allowed employers to defer payment on the employer contribution of Social Security payroll taxes through the end of 2021. Half of this deferred amount would be due to be paid on December 31, 2021, and the other half by January 1, 2022. This benefit no longer exists.
22 Small Business Tax DeductionsWhether you’re just starting a small business or your company is already well-established, here is a list of write-offs that may be available to you. It can be a good idea to consult a tax professional, like a CPA, to find out which of these deductions your small business is eligible to receive.
1. Advertising and PromotionThe cost of advertising and promoting your business is typically 100 percent deductible. This can include costs related to hiring someone to design a business logo, launching your website, buying ad space in print or online media, running a social media marketing campaign, or sponsoring an event.
2. Car ExpensesIf you use your car for business activities, such as driving to see a client or going to the store to buy office supplies, the costs may be tax deductible as long as you keep track of the mileage. The deductible mileage rate for 2022 is $.58 per mile. If you have only one vehicle and use it for both personal and business needs, you will likely need to separate the mileage in order for car expenses to be considered a self-employed tax deduction.
3. Energy Efficient ImprovementsThanks to the Inflation Reduction Act, small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power – lowering operating costs and protecting against the volatile energy prices that are currently squeezing small businesses. Small business building owners can receive a tax credit up to $5 per square foot to support energy efficiency improvements that deliver lower utility bills.
4. Purchase of Electric CarIf you bought a new, qualified plug-in electric vehicle (EV) in 2022 or before, you may be eligible for a clean vehicle tax credit up to $7,500 under Internal Revenue Code Section 30D. You may qualify for it for buying a qualified new car or light truck. The credit is available to individuals and businesses.The credit equals:
The maximum credit is $7,500. It is nonrefundable, so you can't get back more on the credit than you owe in taxes. You can't apply any excess credit to future tax years.
- $2,917 for a vehicle with a battery capacity of at least 5 kilowatt hours (kWh)
- Plus $417 for each kWh of capacity over 5 kWh
5. Child Care Facilities for EmployeesIf you provide child care for your employees either on-site or through a contract with an outside facility, you could be eligible for the Child Care Credit. The credit is available for 25% of child care expenses, plus 10% of qualified resources and referred expenditures. You would claim it by filling out Form 8882.
6. Bad DebtIf you loaned money to an employee, client, or supplier and it wasn’t paid back, or if you made credit sales to customers that were never paid, you may be able to claim the outstanding debt as a business tax deduction. Typically, you need to have proof that it was indeed a business debt and not a personal loan to write off these debts.
7. Business MealsDo you take clients (or potential clients) out for meals to discuss business? If so, these costs may be 50 percent tax-deductible. The snacks and meals you buy for your employees are also typically 50 percent deductible. Food provided at company parties is generally 100 percent deductible. In order to be eligible, food costs typically need to be reasonable — extravagant meals likely won’t qualify.
8. Business InsuranceYou likely have at least one type of insurance coverage for your company and/or your staff. That might be workers’ compensation, liability, property, or data breach insurance. If the insurance policy is considered ordinary and necessary, you can typically write off 100 percent of your premiums.
9. Business Loan InterestIf you’ve taken out loans for business purposes, including lines of credit and mortgages on business real estate, or if you’ve used business credit cards, the interest you pay on those loans may be 100 percent tax-deductible.
10. Contractors and FreelancersIf you hire freelancers or independent contractors to help in your business, you may be able to deduct their fees as a business expense. You may also want to keep in mind that if you pay a contractor $600 or more during the tax year, the IRS typically requires you to submit a Form 1099-NEC to both the IRS and the contractor.
11. EducationIf you invest in furthering your knowledge and expertise to give you a leg up in the market, or provide your employees with educational benefits, you may be able to write these costs off as business expenses.Tax-deductible education expenses can include: classes and workshops intended to improve skills in your field, subscriptions to professional publications. attending industry seminars and webinars, and getting business certifications.
12. Equipment DepreciationDepreciation is a way of spreading the cost of business equipment or assets over time. It essentially measures how much an asset’s value has been used up or exhausted during the year. Items that can be depreciated by small business typically include computers and other office equipment, machinery, office furniture, and business vehicles.
13. GiftsIf you give clients and prospects gifts as part of your business, the IRS generally permits you to deduct up to $25 per person per year. Any amount you spend over the $25 limit is not deductible. A gift given to a member of a client's family is also typically looked at as a gift to the client, unless you have a personal connection to the family member.
14. Home OfficeDo you run your business out of your home? If so, you may be able to deduct expenses tied to creating and maintaining that workspace. To qualify for the home-office deduction, you generally must utilize part of your home regularly and exclusively for business. The office does not need to be in a separate room, but it must be in a space solely designated to work and business operations.You can typically deduct home office expenses in one of two ways: simplified (in which you multiply a specified rate by the square footage you use for your business) and regular (which involves you itemizing expenses for home office use, including mortgage interest, rent, insurance, utilities, and depreciation).
15. Legal FeesIf your business has incurred legal expenses, such as hiring a business lawyer or going to court, you are generally able to deduct them as a business expense. Even if you go to court and do not win the case, those legal fees will likely qualify for deduction.The legal expenses incurred, however, typically must be considered ordinary and necessary to the business in order to be considered a tax write-off.
16. Office SuppliesEvery pen, sheet of paper, and toner cartridge you purchase for your business can typically be written off on your taxes. For supplies to be deductible, they generally need to be considered essential to running and maintaining a functional office. It can be a good idea to keep receipts and categorize these small business expenses as you go. This can make it easier to file your taxes at the end of the year.
17. Professional FeesThis category includes expenses incurred hiring professionals like bookkeepers, accountants, and tax preparers for your business.Professional fees may also include any expenses related to obtaining or maintaining professional licenses or memberships in an industry organization.
18. RentIf you pay rent for an office, warehouse, retail space, or other type of business property, that monthly rent expense may be fully tax-deductible. If you deduct rent as a business expense, you will typically not be able to take the home office deduction as well.
19. Salaries and Employee BenefitsAs long as they’re not for you or other business partners, employee salaries and benefits are generally considered write-offs for small businesses. This category typically includes employee’s wages, paid time off, commissions, and bonuses, as well as employer-sponsored life insurance or retirement account contributions.
20. Startup ExpensesIf you started your business in the latest tax year, you may be able to write off up to $5,000 of the expenses you invested in launching. Startup expenses generally include any costs incurred to create or buy the business, such as expenses related to marketing, travel, training, forming a corporation or partnership, and renovating a commercial space.
21. Phone and InternetGenerally, what you spend to provide your business with internet and phone service can be written off to lower tax liability. If you use the phone and internet for a mix of work and personal reasons, however, you can typically only write off the percentage of the cost that goes toward your business use.
22. TravelIf you travel for work, such as to visit clients or attend industry events, your travel expenses may be considered business tax write-offs. This can include transportation (flight, rental car, train, parking and tolls), hotel stays, and meals.Recommended: Tips for Starting a Small Business
The TakeawayOne of the simplest ways to reduce your income tax bill is to ensure you’re claiming all of the tax deductions available to your small business. Understanding which business expenses qualify can help you avoid overpaying come tax time, and also help guide your business decisions throughout the year.Thinking about taking out a loan to grow your business? The interest on that loan may be tax-deductible as a business expense. With Lantern by SoFi, you can explore financing options from multiple lenders without any type of commitment.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Photo credit: iStock/fizkes
About the Author
Susan GuillorySu Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.