A tax deduction is a reduction of total taxable income based on an eligible business expense. Small business tax deductions allow owners to decrease their tax liability, which can save on annual taxes. In this guide to small business tax deductions, we look at small business deductions, the best business lines of credit, and strategies on how to prepare for the upcoming tax season.

Small Business Deductions to Plan For

Planning for the upcoming tax season should begin with ensuring your business is making the most out of the current tax deductions available to small business owners and startup entrepreneurs. Here are some small business deductions for sole proprietorships, partnerships, LLCs, C-corporations, and S-corporations in the upcoming tax season.

Startup Costs

Startup costs and organizational expenses for small business owners don’t technically fit into the tax deduction category because the IRS advises taxpayers to recover these costs as capital expenditures. These costs are considered capital expenditures, rather than short-term expenses because the money spent to start the business is an investment and the expenses are converted into business assets.

This does not mean that small business owners do not receive any deductions for startup and organizational costs. The deductions are just spread out over several tax years as amortization, allowing the business to report more accurate income over the years.

Bad Debts

According to IRS Topic 453, the term bad debt is defined as a “loss from the worthlessness of a debt that was created or acquired in a trade or business.” The tax deduction for business bad debts allows small business owners to recover some of their costs from unpaid invoices (accounts receivable), employee loans, business bank loan personal guarantees, or notes receivable. The challenge for most small business owners claiming a bad debt deduction is providing adequate proof that the debt was related to the business.

Interest Expenses

Small business loans and business credit cards are two vital financial resources for entrepreneurs, still, many small business owners do not realize that the interest expense of business and some personal loan payments are tax-deductible. To receive the deduction, business owners must prove they are legally liable for the debt, repayment of the debt is intended, and the lender and business have a debtor-creditor relationship. To better understand how many of your loan payments may be tax-deductible, consider using a to view possible payment plans with business lenders before completing a loan application.

Small Business Lines of Credit and Loans

Small business loans are issued through traditional lenders or financial institutions, like banks and credit unions, and alternative lenders, like online lending marketplaces. The following loans are common financing options for small businesses and have deductible interest expenses. Other business lending solutions, like cash advances, invoice factoring, or unsecured business lines of credit may also have interest payments that are deductible.

SBA Loans

SBA loans are a funding option for small businesses where the funds are partially guaranteed by the U.S. Small Business Administration. SBA loans offer lower interest rates and down payments than other types of business loans and are a great fit for borrowers who can meet the eligibility requirements, which include providing documents like two years of income tax returns and bank statements. Common SBA loan programs include SBA 7(a) loans and SBA Microloans.

Short Term Loans

Term loans are usually issued by traditional banks or platforms. Both short-term loans and long-term loans provide the borrower with a lump sum payment upfront that is paid back with monthly payments of interest and principal as described in the repayment terms. Qualifying for a term loan is based on business credit history, personal credit score, annual revenue, and a business plan.

Small Business Lines of Credit

The best business line of credit is a great source of small business financing for short-term solutions to fluctuating cash flow or to increase working capital. With small business lines of credit, borrowers are approved for a total amount and can draw funds whenever needed. The annual percentage rate (APR) for revolving credit, like business credit cards and small business lines of credit, is higher than traditional bank loans but offers a fast-funding option to meet business needs. This type of financing is a good solution for borrowers that have a bad credit score or do not have an established business credit history. An unsecured business line of credit can be beneficial, especially for businesses without the assets to present as collateral.

Real Estate Loans

Commercial real estate loans offer new business owners and established businesses long-term financing to purchase an existing building or land. Real estate loans can also be used for entrepreneurs who are considering building a new structure. The down payment and interest rate are determined based on the loan amount and creditworthiness of the borrower but are often lower than other loan offers. Commercial real estate loans that have higher interest rates may be eligible to be refinanced at a later time if lower rates are available and there are no prepayment penalties.

Business Insurance

Business insurance is an unavoidable expense for small business owners but may make them eligible for a tax deduction. The following insurance costs can potentially be tax deductible:

• Owner’s policy
• Owner’s health insurance
• Business continuation insurance
• General liability
• Malpractice insurance
• Property insurance
• Business interruption insurance
• Worker’s compensation
• Auto insurance
• Employer-covered life insurance

Leasing Costs

Rental payments made on an office space or retail space lease are tax deductible as a business expense. The interest on lease payments made on equipment financing for copiers, machinery, and other business equipment is also tax deductible. If the business is run from a home office, the house or apartment rent is not tax deductible as rent but can be included in home office expense deductions.

Depreciation Costs

Learning the right way to calculate depreciation for your small business allows the cost of furniture, equipment, and other assets to be spread over several years and can lead to significant tax savings. However, expensing the costs of fixed assets can lead to a quicker tax benefit. The IRS allows business owners to write off the full cost in one year using any of the following methods:

• Section 179 deduction – This deduction allows up to $1,080,000 of new or used property placed in service during the tax year to be deducted. The amount that can be deducted is limited by annual revenue, but the remainder can be carried forward to future years’ tax returns
• De minimis safe harbor election – This deduction allows business owners to expense any asset with a market value of less than $2,500.
• Bonus depreciation – This deduction allows 100% of the costs for equipment to be expensed in the first year.

Taxes

Business taxes including federal, state, real estate, and sales taxes can be deducted. Other expenses like FICA, FUTA, and state unemployment taxes, are also 100% tax-deductible.

Employee-Related Deductions

The costs of employee salaries and employer-paid benefits can add up quickly for a small business owner, but there is some relief available through tax savings.

Wages and Salaries

Hourly wages and annual salaries paid to employees are fully deductible, including bonuses and commissions. To deduct the cost of a salary, the individual must be formally listed as an employee of the company. For small businesses structured as sole proprietorships or partnerships, the business owners’ salaries are not deductible.

Employee Benefits

Employee benefits encourage new talent, enhance the experience of current staff members, and lead to tax deductions. The following employee programs are tax deductible:

• Education assistance
• Childcare allowances
• Life insurance adoption assistance
• Qualified retirement plan accounts

Contract Labor

The cost of paying independent contractors, freelancers, and even legal and professional services are fully tax deductible. The IRS requires that contract workers are issued a form MISC-1099 or 1099-K for payments more than $600 to be eligible for a tax deduction.

Bottom Line

Filing business income tax returns can be an overwhelming experience for new business owners, but it’s a process that gets easier with knowledge and proper planning. Tax deductions, like those for interest expenses, employee costs, and research and development, can lead to big tax savings. Take some time to get familiar with the latest rules and regulations regarding tax-deductible expenses to reduce your income tax liability.

Many entrepreneurs and motivated individuals shy away from new business opportunities because of a lack of funding or a fear of not qualifying for financial assistance. However, funding tax payments or new business ventures can be as easy as a quick online application.

FAQs About Small Business Tax Deduction

What is the biggest small business tax deduction mistake that owners make?

Filing taxes is confusing for most people. Small business tax deduction mistakes include not filing on time, keeping poor records throughout the business year, not paying on time, not separating personal and business finances, and not using a small business accountant.

What is 100% tax deductible for small business deductions?

A 100 percent tax deduction is a business expense that you can claim 100% on your income taxes. For small businesses, expenses that are 100% deductible are items that are used all year round for the business – things like furniture and equipment.

How often do small business tax deductions change?

Small business deductions change annually. Be sure to check the IRS website to learn of annual changes to small business tax deductions.

H3: What cannot be written as a small business tax expense?

Personal expenses like entertainment, travel, and food – all for personal use – cannot be considered a tax deduction.

Frequent searches leading to this page