6 Tax Write-Offs For Small Businesses You Should Know

In the ever-evolving landscape of owning and operating a business, maximizing profitability is always paramount, particularly for high-net-worth business owners. One often overlooked area of financial optimization for businesses is tax write-offs for small businesses. These legal deductions can significantly reduce your annual tax liability, and consequently, increase your bottom line.

Strategic use of small business tax write-offs can not only improve your fiscal health but can also aid in the growth and expansion of your enterprise. After all, the more money saved on taxes, the more you have to invest back into your business. Here’s a breakdown of some key tax write-offs that small business owners should be aware of.

What is a tax write-off for small business?

Before delving into specific deductions recognized by the IRS, it’s essential to understand what exactly a tax write-off for small businesses is. Simply put, a tax write-off reduces the taxable income of your business, resulting in a lower tax bill. Write-offs are an essential component of tax planning strategies and allow businesses to deduct expenses incurred for the purpose of conducting business operations, resulting in a more accurate representation of your business’s true income for the year.

It’s important to note that these deductions are only applicable to businesses that operate as sole proprietorships, partnerships, LLCs, or S corporations. C corporations are not eligible for the same deductions.

What business expenses are tax deductible?

Several business expenses are tax deductible, provided they are deemed ordinary and necessary in the course of operating your business. Here are some of the most common deductible expenses for small business:

1. Home office expenses

Home office expenses can be a significant tax write-off for small business owners who operate their business from home. To qualify as a home office, the Internal Revenue Service (IRS) stipulates that a specific area of your home, such as a room or a separate structure, must be used regularly and exclusively for business. The ‘exclusive use’ test is stringent; if the area is used for both business and personal purposes, it does not qualify.

If your home office meets the qualifications, you can deduct a portion of your home expenses relative to the size of your home office compared to your entire home. These expenses can include mortgage interest or rent, utilities, insurance, and home maintenance. You can also include the business portion of depreciation for your home in your home office deduction.

2. Vehicle expenses

Vehicle expenses can also prove to be a valuable tax deduction for small businesses. If you use your car or truck in your business, you may be able to deduct certain costs. The IRS allows two methods for computing this deduction: the standard mileage rate and the actual expense method.

Under the standard mileage rate, you deduct a specified number of cents for every business mile you drive. As of 2024, the standard mileage deduction is 67 cents per mile. This rate covers the costs of fuel, maintenance, insurance, and depreciation.

The actual expense method, on the other hand, allows you to deduct the actual costs of operating the vehicle for business use. These costs may include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments). However, if the vehicle is also used for personal purposes, you can only deduct the portion of expenses related to business use.

In both cases, it’s crucial to keep accurate records of your business miles and expenses to validate your deductions.

3. Business travel expenses

Business travel expenses are another one of the best tax write-offs for small businesses. These expenses are defined as the ordinary and necessary expenses of traveling away from home for your business, profession, or job. This can include expenses incurred for trips to meet clients, attend conferences, purchase supplies, or any other trips that are strictly for business purposes. 

Examples of deductible business travel expenses include:

• Transportation: Airfare, train, bus, or car expenses related to business travel.
• Lodging: Hotel or Airbnb costs for nights you are away on business.
• Meals: Food and beverages for yourself during business travel. Note, however, that only 50% of meal expenses can typically be deducted.
• Tipping: Tips given to porters, hotel staff, or other service providers during the business trip.
• Other related incidental expenses: Such as taxi fares, internet connection fees, or any other necessary expenses that arise during the course of your business trip.

It’s important to note that the IRS requires that these costs be reasonable. Lavish or extravagant expenses may not be deductible. As always, maintaining thorough records, including receipts, dates, and the purpose of your trip, is essential for substantiating these deductions.

4. Education and training costs

Continuing education and training are essential for staying competitive in your field, and fortunately, these expenses can also be written off as a small business owner. This includes the cost of courses, seminars, workshops, conferences, and even online classes directly related to your business.

5. Health insurance premiums

Health insurance premiums can also be a beneficial tax deduction for small businesses, particularly if you are self-employed. The IRS allows self-employed individuals to deduct their health insurance premiums, including medical, dental, and long-term care insurance for themselves, their spouse, and their dependents. 

If you as the employer pay premiums for your employees’ health insurance coverage, these costs are usually 100% deductible. This not only reduces your tax liability but also promotes wellness and productivity within your workforce, making it a win-win situation.

However, it’s important to note a few key conditions. Firstly, the insurance plan must be established under your business. Secondly, your deduction cannot exceed the earned income you collect from your business. Lastly, you cannot take the deduction for any month in which you are eligible to participate in any subsidized health plan maintained by your current employer or your spouse’s employer.

6. Retirement contributions

Retirement contributions represent another significant area for tax deductions for small businesses. If you contribute to a retirement account, such as a Simplified Employee Pension (SEP) plan, Savings Incentive Match Plan for Employees (SIMPLE), or a solo 401(k) plan, your contributions might be deductible. 

SEP and SIMPLE IRA plans are specifically designed for small businesses and the self-employed. Contributions made to these plans are typically tax-deductible, reducing your taxable income for the year. With a SEP IRA, you can contribute up to 25% of your compensation or $69,000 for 2024, whichever is less. In the case of a SIMPLE IRA, the contribution limit for 2024 is $16,000.

Solo 401(k) plans, suitable for businesses with no employees other than the owners and spouses, also allow for significant pre-tax contributions. For 2024, you can make elective deferrals up to $23,000, and total contributions (including both your elective deferrals and employer non-elective contributions) can’t exceed $69,000.

Learn more: How to save for retirement as a small business owner

How do tax write-offs work for small businesses?

Tax write-offs work by reducing the amount of income that your business is taxed on. When you incur an expense that is directly related to running your business, you can deduct that cost from your total income. This means that the income you report to the IRS — and are subsequently taxed on — is lower, potentially placing your business in a lower tax bracket and reducing your tax liability.

To take full advantage of tax write-offs, it’s essential to keep meticulous records throughout the year. Save all receipts and invoices related to business expenses and categorize them according to the IRS’s list of deductible business expenses. If possible, consider using a business expense tracking software or hire a professional accountant for more accurate tracking.

When you’re ready to file your taxes, you’ll need to submit Schedule C (Form 1040 or 1040-SR), “Profit or Loss From Business”, to the IRS. This form allows you to list your total income and all of your deductible expenses. The difference between your income and your deductions is your net profit or loss, which you’ll report on your personal income tax return. 

Remember, tax laws can be complex and frequently change, which is why it’s best to consult with a tax professional or CPA to verify that you’re correctly calculating and claiming your tax write-offs.

Work to optimize your tax savings with Avidian Wealth Solutions

Understanding and effectively utilizing tax write-offs for small businesses can significantly work to reduce your tax liabilities and enhance your business’s financial health. Such deductions span a wide range of expenses, from education and training costs directly linked to the business, health insurance premiums for both the self-employed and their employees, all the way to contributions made towards retirement plans.

With experienced guidance from Avidian Wealth Solutions, small businesses can fully leverage these tax write-offs, maximizing savings while remaining compliant with IRS regulations. Our team acts as your financial partner, offering solutions for everything from business succession planning to retirement planning, and more.

Schedule a conversation with us today to learn how we can help optimize your tax savings with comprehensive financial planning for business owners in Houston, Austin, Sugar Land, and The Woodlands

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