Business Tax Deductions: The Complete Guide

Business Tax Deductions: The Complete Guide

Business tax deductions directly reduce your taxable income, which lowers both your income tax and self-employment tax. Knowing what you can deduct -- and documenting it properly -- is one of the most impactful things you can do for your bottom line.

The Standard for Deductibility

The IRS allows you to deduct expenses that are "ordinary and necessary" for your trade or business. "Ordinary" means common and accepted in your industry. "Necessary" means helpful and appropriate for your business. An expense does not need to be indispensable to qualify.

Major Deduction Categories

Startup Costs

You can deduct up to $5,000 in startup costs in your first year of business, plus an additional $5,000 in organizational costs. If your total startup costs exceed $50,000, the $5,000 deduction begins to phase out. Remaining costs are amortized over 15 years.

Home Office

If you use a portion of your home regularly and exclusively for business, you can deduct the business percentage of your rent/mortgage interest, utilities, insurance, repairs, and depreciation. The simplified method allows $5 per square foot, up to 300 square feet ($1,500 maximum).

Vehicle Expenses

You can deduct business use of your vehicle using either the standard mileage rate (65.5 cents per mile for 2023) or actual expenses (gas, insurance, maintenance, depreciation). Track every business trip with date, destination, business purpose, and miles driven.

Office Supplies and Equipment

Supplies, computers, software, furniture, and other equipment used in your business are deductible. Items over a certain threshold may need to be depreciated over time, but Section 179 and bonus depreciation often allow you to deduct the full cost in the year of purchase.

Section 179 and Bonus Depreciation

Section 179 allows you to deduct the full purchase price of qualifying equipment and software in the year you buy it, up to $1,160,000 for 2023. Bonus depreciation allows 80% first-year depreciation on new and used qualifying assets (stepping down from 100% in 2022).

Professional Services

Fees paid to accountants, attorneys, consultants, and other professionals for business-related services are fully deductible.

Insurance Premiums

Business insurance premiums are deductible, including general liability, professional liability, commercial property, workers' compensation, and business auto insurance. Self-employed individuals can also deduct health insurance premiums as an adjustment to income.

Retirement Plan Contributions

Employer contributions to employee retirement plans are deductible. Self-employed individuals can deduct contributions to SEP IRAs, SIMPLE IRAs, and Solo 401(k) plans. These contributions also reduce your self-employment tax base.

Business Travel

Airfare, hotels, rental cars, and 50% of meals while traveling for business are deductible. The travel must be primarily for business purposes, and you must be away from your "tax home" overnight.

Meals

Business meals are 50% deductible when you or an employee is present and the meal has a clear business purpose. Keep receipts and note who attended and the business topic discussed.

Marketing and Advertising

Costs for advertising, website development and hosting, business cards, social media marketing, and promotional materials are fully deductible.

Education and Training

Courses, workshops, books, and subscriptions that maintain or improve skills needed in your current business are deductible. Education that qualifies you for a new trade or business generally is not.

Interest

Interest on business loans, business credit cards, and the business portion of mixed-use loans is deductible. Track business versus personal use carefully.

Rent

Rent for your office, warehouse, equipment, or other business property is fully deductible.

Wages and Benefits

Salaries, wages, bonuses, and employee benefits (health insurance, retirement contributions, etc.) are deductible business expenses.

Bad Debts

If you use the accrual method of accounting and a customer does not pay, you can deduct the uncollected amount as a bad debt. Cash-basis businesses generally cannot take this deduction because the income was never reported.

Documentation Requirements

The IRS requires adequate records to support your deductions. At minimum, keep:

• Receipts for all expenses over $75 (and for any lodging regardless of amount)
• Mileage logs with date, destination, business purpose, and miles
• Bank and credit card statements showing business transactions
• Invoices and contracts for professional services
• Records of asset purchases including date, cost, and business use percentage

Digital record-keeping is acceptable. Use an accounting app or dedicated business bank account to simplify tracking.

Common Mistakes to Avoid

1. Mixing personal and business expenses: Use separate accounts and credit cards
2. Missing deductions: Track every expense, no matter how small
3. Inadequate documentation: A bank statement alone is not enough -- you need receipts and records of business purpose
4. Deducting personal expenses as business: The IRS looks for this, and penalties for fraud are severe
5. Forgetting the home office deduction: Many qualifying business owners skip this

The Qualified Business Income Deduction (Section 199A)

Pass-through business owners may also qualify for the QBI deduction, which allows you to deduct up to 20% of qualified business income from your taxable income. This deduction has income thresholds and limitations for specified service trades, so consult a tax professional to determine your eligibility.