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These are the questions I get asked more than anything else in my CPA firm:

• “What are some deductions that people miss?”
• “What deductions can I take for my small business?”
• “Does this count as a write-off? It is allowed?”

And it’s understandable. Since the early 2010s, the federal tax code has exceeded 70,000 pages – and is growing every single year! Tax law can be Byzantine and counterintuitive.

It’s no wonder people don’t feel confident in what they can and cannot do.

We’re going to provide you a helpful reference list for some of the most common small business tax deductions. This will cover A LOT of the expenses you’re going to have for your business and get you in the right mindset for other allowable expenses.

But the more good news is that you’re probably overthinking it. Tax law is full of all sorts of exceptions and caveats to rules, which is one of the reasons no one knows what they can and cannot expense. But most of the time, if you’re buying something specifically for your business, the chances are that it’s deductible.

We’ll discuss some of those exceptions below, but if you had to part ways with your hard-earned money to buy something for the business, the odds are better than not that it’s a deductible expense.

All of these expenses will be 100% deductible unless we note otherwise.

1. Advertising
2. Bad debts
3. Bank charges
4. Business meals
5. Cleaning and janitorial expenses
6. Computer expenses
7. Contract labor
8. Credit and collection costs
9. Dues and subscriptions
10. Employee benefit programs
11. Equipment purchases
12. Insurance
13. Interest
14. Inventory and Cost of Goods Sold
15. Legal and professional expenses
16. Office supplies
17. Postage and delivery
18. Printing
19. Research & Development (R&D)
20. Rent
21. Repairs and maintenance
22. Retirement plan contributions
23. Salaries and wages
24. Security
25. Start-up and Organizational Costs
26. Taxes and licenses
27. Telephone and utilities
28. Tools
29. Training and continuing education
30. Travel
31. Uniforms and laundry
32. Vehicle expenses

Advertising

Marketing and advertising are one of the most important tools for growing a new business and sustaining that growth as the business matures. Most advertising expenses are 100% deductible. Some examples include:

• Website design and hosting
• SEO (Search Engine Optimization) and PPC (pay per click) advertising
• Social media marketing such as Facebook ads
• Sales funnels and email marketing programs
• Business cards, brochures, and other print advertising
• Event sponsorships
• Cards and other items sent to clients

In general, expenses incurred to generate new business will be deductible. But there are two significant exceptions:

1. Gifts. Business gifts are only deductible up to $25. This may seem like an unreasonably small amount – and it is. This limit was instituted back in 1962 and has not been adjusted since. Adjusted for inflation, that $25 back in 1962 would be worth over $200 today.
2. Entertainment. Client entertainment was 50% deductible up until the Tax Cuts and Jobs Act was passed. Since that legislation went into effect in 2018, entertainment can no longer be deducted.

Bad Debts

If a client does not pay you, you do not have to pay tax on that bad debt. But the way you deduct this will depend on what basis of accounting you use.

If your business is on an accrual basis, you count income when it is earned, and expenses are recognized when they are incurred. So, the income will show up on their books for many businesses as soon as they generate an invoice.

If a client does not pay, that never received income needs to be written off. This will often be done by writing off the invoice and showing a bad debt expense on your Income Statement for the amount not received.

But if your business is on a cash basis, income is not recognized until received, and expenses are not shown until paid. So until payment from a customer is received, it will not show up as revenue. So there is no need (nor is it allowed) to put a separate expense in addition to that.

This is an area of confusion for many clients on a cash basis. The revenue is lost, and it intuitively feels like it should be able to be written off. Unfortunately, the IRS would consider this double-dipping. From their perspective, your “write-off” was not counting the unpaid amount as revenue in the first place.

Bank Charges

You always want to have separate bank accounts and credit cards for your business.

Intermingling business and personal expenses will complicate your bookkeeping, is one of the easiest ways to miss expenses, and may increase your liability from a legal perspective.

If these accounts have any fees associated with them, such as monthly service fees, annual dues, wire fees, or overdraft fees, those expenses would be deductible.

Business Meals

Historically, most meals have only been 50% deductible. Certain employee meals (such as at a company picnic) are 100% deductible. But meals such as taking a client out to lunch are limited to the 50% limitation.

Because of the effects of COVID on restaurants, the IRS allowed for a greatly expanded list of 100% deductible meals for 2021 and 2022. This included meals provided at the convenience of the employer, client business meals, and meals during business travel.

Cleaning and Janitorial Expenses

Office cleaning and other janitorial expenses related to keeping your office space tidy are deductible. If you move to a new office, the costs of cleaning your old office upon move-out and your new office for moving in would both be deductible.

Computer Expenses

Most businesses are increasingly technology-driven, and the expenses associated will be deductible. These might include:

• Computer maintenance
• Software subscriptions
• Computer supplies
• Computer and computer-related equipment purchases
• Software purchases

It is worth noting that, like other large equipment purchases, the purchase of an actual computer or a server would need to be depreciated over time rather an expensed all at once – generally over five years. And for certain software licenses that are purchased (not SaaS) are usually depreciated over three years. For more information on this and ways to still expense the full amount in the year of purchase, reference the Equipment Purchases and Depreciation section.

Contract Labor

Before a business can afford to hire actual employees, they’ll usually start by using freelancers or other contractors on a temporary basis. The amount you pay to these independent contractors is fully tax-deductible.

If the contractor is paid over $600 for the year (and is not taxed as a corporation), you will be required to issue them a 1099-NEC form and file a copy with the IRS. These are due by January 31st of the following year, so a best practice is always to get the contractor to fill out a W-9 before you start working with them. This will save you a lot of time and hassle trying to track them down in January when you’re fighting the clock.

Credit and Collection Costs

Costs associated with accepting payment from customers will be deductible. This could include credit card processing fees, fees your bank charges you to initiate ACH drafts, and other expenses charged by third-party payment processors. Even charges from invoice factoring services would be deductible, although a portion of their fee would need to be classified as interest expense.

Dues and Subscriptions

Dues and subscription fees paid to professional organizations are 100% deductible. Dues to civic organizations such as a Rotary club are also fully deductible. Under new tax laws, country clubs or dues for organizations that are more recreational in nature are not deductible unless they are shown as taxable compensation on the corresponding employee’s W-2.

Employee Benefit Programs

Health, dental, and vision insurance paid for employees are fully deductible.

There are also some additional perks for structuring employee compensation this way.

While wages paid to an employee are subject to payroll tax (and are fully taxable to the employee), many employee benefit programs are not.

In addition, health insurance premiums paid may qualify for tax credits if you are a smaller employer, although this varies based on the circumstances of the business.

Equipment Purchases and Depreciation

Equipment purchased for the business will generally be able to be expensed… eventually.

The reason we say eventually is that for tax purposes, buying equipment is not an expense.

Rather, it is the purchase of an asset. And assets are depreciated (expensed) over time – generally over a period of what is expected to be their useful life. Computers are depreciated over five years, office furniture over seven years, etc.

By default, those assets you purchased will slowly be written off on your tax return over that asset’s useful life. This is relevant to note because your cash outflow will not match the tax deduction you receive. You may have spent $10,000 on new furniture and equipment at the end of the year, but your tax return is only going to show a fraction of that.

In some cases, letting the asset depreciate naturally is the best approach. But in others, it can be painful. Thankfully, there are fixes available if needed. Bonus Depreciation and Section 179 depreciation will allow you to expense an increased portion or the entirety of a new asset in the year purchased. This will enable you to treat it much more like regular expenses and your other cash outflows.

Home Office Deduction

The home office deduction is one of the most frequent questions we get asked by new business owners. And it’s understandable because you’re getting a write-off for money you’re already spending. You get to write off a percentage of your rent (or depreciate a portion of your house), utilities, insurance, repairs, maintenance, and real estate taxes. That sounds like a win all around.

The issue becomes that there are many caveats with and limitations to the home office deduction. You cannot benefit from it if your business is already at a loss, it needs to be your primary place of business, the use of the space has to be regular and exclusive, it can increase your risk of audit, and if you own your house, it can generate taxable income when you finally sell.

We’re not inherently against the home office deduction, but it’s not quite the free lunch that it sounds like on the surface and is something that should be discussed in-depth with your CPA. A more comprehensive guide to some of these caveats can be found in this article.

Insurance

Most insurance premiums you pay for your business are deductible. These might include:

• General liability coverage
• Professional liability insurance such as E&O (errors and commissions) insurance or malpractice insurance
• Auto insurance if you are not taking the standard mileage rate. For more information on this, see the Vehicle Expense section.
• Workers compensation insurance
• Property and casualty insurance
• Health, vision, and dental insurance. See the Employee Benefits section for more details.

Life insurance premiums may or may not be deductible depending on the beneficiary and the type of policy. Term life insurance policies for paid employees will generally be deductible if the business is not a beneficiary on the policy.

Whole life and universal life policies along with term life policies where the business is a direct or indirect beneficiary generally will not be deductible. The good news is that proceeds from life insurance are typically not taxable income.

The precise details of your business and the insurance policy you purchase matter greatly here. You should consult closely with your insurance agent and CPA to understand the tax consequences of the policies you are purchasing.

Interest

Interest paid on business purchases will generally be deductible. This includes interest paid on:

• Business lines of credit (LOC)
• Auto loans
• Business credit cards
• Equipment loans
• Mortgages in the business’s name

One thing to note is that the only interest component of these payments is deductible. The principal portion of loan payments is not an expense for tax purposes; it is the reduction of a liability.

This can confuse people and get them into trouble if they are not aware of it. As an example, let’s say a business owner has a rough couple of years when they are first starting the business and has to take out a $50,000 line of credit. A few years later, the business is doing well, and they choose to pay off the entire balance.

That is a $50,000 cash outflow and $50,000 the business owner no longer has available to them. But it is NOT an expense and is not tax-deductible.

This is not to say that managing your debt is not important and not to say that in certain instances, attacking that debt will not be warranted. But the lack of deductibility is something business owners need to be keenly aware of when they are paying off debt.

Similar to depreciation from asset purchases, cash vs. accrual methods of accounting, and inventory not being an expense until sold (see Inventory / Cost of Goods Sold section below for more information), that disconnect between the amount of cash spent vs. the amount that can be deducted can cause a taxpayer a lot of pain if they do not understand the rules surrounding them.

Inventory / Cost of Goods Sold (COGS)

If you are a retailer, manufacturer, or otherwise have any sort of inventory you purchase or produce, the costs associated with creating or acquiring that inventory are tax-deductible. But much like equipment purchases, we will need to tack on another “eventually.”

Inventory is considered an asset, not an expense. It is not until the inventory is sold that it is a deductible expense. It is “Cost of Goods SOLD” after all. While the inventory is sitting on the shelves, it is an asset ready to generate more revenue (at least for accounting purposes. Savvy retailers know that inventory functions closer to a liability until it is sold – especially if it sits for any amount of time).

This can cause significant problems if business owners are not aware of it. A retailer may purchase $100,000 worth of inventory at the end of the year but only sell $20,000. That remaining $80,000 is still included in their taxable income for the year. And will stay that way until the inventory is sold or written off.

Fluctuations in inventory from the beginning to the end of the year can also cause similar problems. Given this, it is very important for any business with inventory to closely track these figures and be aware of the tax ramifications.

Legal and Professional Expenses

Expenses paid to your attorneys, CPAs, and other professionals related to the business are tax-deductible. If these expenses are associated with the start-up of a new business, there may be limitations. Reference the Start-up and Organizational Costs section for more information.

Office Supplies

Supplies used to keep your office running like paper, pens, ink, tape, staplers, scissors – those many tiny miscellaneous expenses are deductible. These are also items that it can be easy to forget about it. If you pay cash (which we don’t recommend) or are out buying groceries at Wal-Mart and pick up a pack of pens while you’re there, it’s easy to forget about those expenses.

In isolation, these missed expenses add up to very little, but in aggregate, they can be substantial, which is again one of the reasons we always recommend using a business credit card. And if you are making business and personal purchases on the same trip, separate them into two separate transactions.

Postage and Delivery

Postage and delivery fees associated with running your business are deductible. For most businesses, this will just be a line-item expense for postage, but if you are an eCommerce business or another business where you are shipping products to customers, it can be a good idea to include that as part of your COGS so that you are more appropriately tracking your profit margins.

Printing

Printing costs will typically be deductible. This would include printing for more external use such as brochures, pamphlets, business cards, and printing for internal use such as company manuals.

Research & Development (R&D)

Research and Development costs are deductions (reductions in your taxable income), but in some cases, they may even qualify for tax credits (dollar for dollar offsets against your tax bill). This can be massive for businesses in certain industries.

However, one note of caution is that some companies will aggressively push R&D credits without fully understanding the requirements to qualify for them. I was once on a phone conversation with a client where a company was trying to push them to take R&D credits – claiming that their running A-B testing on Facebook ads was them “researching” what approach works best.

That’s just not the way it works, and the IRS is not stupid. When they say research, they mean actual research. It needs to be based on hard science, it needs to be activities and research that are done outside of the normal operation of the business, and there also needs to be a risk to the business owner that the research will not pan out.

Many businesses do qualify for these credits, and when they do, they should absolutely be explored. Just be wary of “too good to be true” claims by companies and claims that do not seem to make sense.

Rent

The rent paid for your office is tax-deductible. You’re also able to deduct amounts paid on equipment rentals.

Rent paid on your personal residence will not be deducted here. There is a mechanism for it under the home office deduction, although there are limitations. See the Home Office section for more details.

One other area of note here is that you likely need to discuss the proper tax treatment with your CPA if you have an equipment lease. There are rules for classifying these payments based on whether it is deemed an “operating lease” or a “capital lease.” The particulars of your lease agreement will determine which you have. Operating leases are allowed to be expensed like a regular rental. Capital leases are treated as though you have purchased an asset and are financing it.

Repairs and Maintenance

Repairs you have to your office space and equipment you own are deductible. This may be especially relevant as Triple Net Leases (NNN) increase in popularity and tenants are on the hook for building upkeep.

Repairs to your home may be deductible, but this would fall under the home office deduction. See that section of this article for more information.

Retirement Plan Contributions

The costs of creating and administering a retirement plan such as a SEP, SIMPLE, or 401(k) for your employees are tax-deductible. Any employer contributions you make on their behalf will also be deductible to you and can be a nice incentive for employee morale and retention.

One area of note that should be discussed with your financial advisor and retirement plan administrator is the matching requirements as an employer.

The compliance requirements vary quite a bit based on the type of plan you have, but especially the plans that allow you to contribute the most aggressively towards your own retirement will have requirements for employee participation and employer matches or even unmatched contributions. They aren’t going to allow a situation such as a company has 100 employees, but the CEO (making $200k) be the only one participating in the retirement plan, and the company is also doing an employer match of $50k into his retirement plan. That plan would not be even remotely close to compliant.

Again, these employer matches are not inherently bad things and may be benefits you choose to provide for your employees regardless. But when these costs are mandated (and may affect how much you put into your retirement), you need to be aware of them.

Salaries and Wages

Wages and bonuses paid to your employees – including PTO – are deductible. This includes W-2 wages (wages run through actual payroll and subject to payroll tax) paid to the business owner but does not include owner draws/shareholder distributions. Shareholder distributions (where you are simply cutting yourself a check or transferring money to your personal bank account) are considered you taking equity out of your company and are not business expenses.

Of course, the deductibility of these wages is assuming that those wages were reasonable and necessary for the business and that services were actually performed.

Sometimes clients will want to hire their children, which is allowed and can be a viable strategy under the right circumstances. But I’ve also had instances where all three criteria above have failed. One in particular always sticks in my mind where the business owner wanted to hire their seven-year-old as a “model” for the company website and pay them $12,000.

The photoshoot would take about an hour. A pretty nice payday for a kid who had never modeled before, and I do not believe has modeled since.

Situations like that are, of course, completely unreasonable, and the IRS will not tolerate them. But for most wages paid to real employees, you can deduct them with no problem.

One small item of note: on your tax return, you will need to put gross wages (before deductions) along with employer-side payroll taxes. This can be a bit of a pain for some taxpayers since the amounts are drafted from the bank as net wages (after all of the deductions are taken out), and the tax payments are lumped together (including employee-side payroll taxes and withholding). If possible, you want to list these items in your books as they’ll appear on your tax return. If that’s not feasible, you’ll need to get a “payroll summary” report to provide to your CPA come tax time.

Security

Cameras, smart locks, and other physical security measures you put in place to protect your place of business are tax-deductible – as are subscriptions that may be associated with them. In addition, the cost of cybersecurity is also likely deductible.

You can even deduct the cost of a guard dog, which is one of the very few instances where pet expenses are allowed. Although it’s probably good to clarify that even if you take your teacup Chihuahua to the office every day and they bark a lot, that is not a guard dog from the IRS’s perspective.

Start-up and Organizational Costs

The IRS allows you to deduct up to $5,000 in business start-up costs and $5,000 in organization costs. It is worth noting that this is only if your start-up or organizational costs do not exceed $50,000. If they exceed $50,000, this $5,000 begins to be reduced, and the remaining will need to be amortized over time.

Taxes and Licenses

Many of the taxes you’ll pay are tax-deductible:

• Business licenses and annual LLC/corporation fees – including the initial fees to set up your LLC, S-Corp, or C-Corp
• The employer portion of payroll taxes
• Real estate taxes on business property
• Personal property taxes on business property
• Sales, excise, and use taxes

Individual income taxes you pay are NOT tax-deductible, even if paid from the company account. Those income taxes are personal expenses for the business owner and are not business expenses.

Especially as your earnings increase, it is very important to make sure this is classified properly. If you have your personal income taxes (either the prior year’s balance due or the quarterly estimates you are paying throughout the year) shown as an expense on your Profit & Loss, that is going to greatly distort what you think your tax liability is going to be and you’re going to be in for a nasty surprise come April 15th.

Ideally, those payments should be made from your personal account rather than the business account. But if they are made from the business account, ensure that they are classified as shareholder distributions so that they do not skew your P&L.

Telephone and Utilities

A business telephone along with the utilities at your office are tax-deductible. That’s pretty straightforward.

Many business owners do not realize that they can also expense the business percentage of their cell phone and home internet bill.

Other home utilities would generally only be able to be taken as part of the home office deduction. Reference the Home Office Deduction for more information.

Tools

Small tools you purchase for the business are fully deductible. For larger tools, these would need to be depreciated over time like other assets. See the Equipment Purchases and Depreciation section for more information.

Training and Continuing Education

Training or continuing education that allows you to continue performing your current profession is deductible. Other types of training are more difficult to determine. Training that is preparing you for a new career generally will not be deductible, although it may qualify as an education expense. In some cases, the line between current and new professions is very clear. If you’re a plumber and are going to school to become an optometrist, that’s a very obvious distinction. But additional training in your existing field that may be expanding your expertise can be more difficult to determine. These issues should be discussed with your CPA based on the particulars of your situation.

Travel Expenses

Travel expenses are often legitimate and deductible, although some business owners abuse them. The IRS states that “[t]ravel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job. You can’t deduct expenses that are lavish or extravagant or that are for personal purposes.

You’re traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away.”

Sometimes a person’s definitions of “necessary” and “business purpose” can be a bit stretched. That’s not to say legitimate travel expenses should not be taken, only that the primary purpose of the travel should be for business and that the expenses are reasonable.

You may have a client in Tahiti, but the IRS is unlikely to believe that you flew over there and hung out on the beach for three weeks because you really needed to have a one-hour meeting with them.

In fact, the IRS makes allowance for trips that are mixed-use personal and business. Let’s say the primary purpose of that trip was to meet with the client. You all worked for two weeks, and you decided to stay a third week to vacation. You would be able to deduct the entirety of the travel expenses (including airfare both ways) to get there. Regardless of how long you stayed, those costs would be the same. You would also be able to deduct the meals, lodging, taxis, parking, etc., costs for the two weeks you were there for work. The costs of the remaining week where you were vacationing would not be business expenses and could not be deducted.

Uniforms and Laundry

The cost of uniforms and as well as the laundry services for those uniforms will generally be deductible. The key here, however, is what qualifies as a uniform.

For most of us, the idea of a uniform would just be clothes that are necessary for work. A lawyer could reasonably say that his suit qualifies as a “uniform.”

Unfortunately, that does not fit the parameters set by the IRS. To qualify as a work clothing:

• Your job must require that clothing
• The clothing cannot be suitable for everyday wear

Scrubs worn by medical staff or clothes with company logos on them are not suitable for everyday wear. But even though many jobs require a particular type of clothing such as suits or other dress wear, since they can be worn in other settings, they cannot be deducted.

Vehicle Expenses

There are generally two options when it comes to vehicle expenses:

• Taking the standard mileage rate. In 2023 the standard mileage rate is 65.5 cents per mile driven for business.
• Deducting actual expenses. This would be all of the costs associated with operating the vehicle. Gas, repairs, maintenance, insurance, taxes and registration fees, and depreciating the purchase price of the vehicle itself. If the vehicle is used 100% for business, 100% of these costs can be deducted. If used for personal and business, you can only deduct these costs multiplied by the percentage of business use.

Which approach is best for you will largely depend on your situation. If you drive 100,000 miles a year on a Prius that you bought for $15,000, then the mileage is the clear winner. If you have an $80,000 dually F-350 that gets 7 miles to the gallon and you’re only driving 5,000 miles a year – it’s going to take a long time to break even if you go with mileage.

One crucial thing to note here: if you ever want to take mileage on a vehicle, you are required to take it in the first year.

Why?

Because depreciation expense is built into the standard mileage rate, and if this restriction did not exist, people would buy a truck, use Section 179 depreciation to expense the entire purchase price in the first year, and then go back to mileage. Effectively, they would be double-counting that expense since the mileage rate accounts for depreciation.

If you take mileage in the first year, you can toggle back and forth between mileage and actual expenses in the subsequent years, depending on which one is better.

There’s no right or wrong answer, and like many of these other decisions, it is something you should discuss with your CPA. There are times when taking actual expenses still absolutely makes sense. But the loss of the ability to take the standard mileage rate for the entire time you own the vehicle is not inconsequential.

Bottom Line

These are easily the most common expenses that entrepreneurs can deduct from their businesses. So we hope this guide has been helpful and encourage you to bookmark it as a reference.

But as you can see from a number of these items, these deductions can vary greatly based on your situation. This is a great starting point, but we encourage you to regularly consult with your CPA to make sure you aren’t missing any opportunities. A good CPA can save you more money than any other advisor, and a bad one can cost you more money than almost anyone else.

Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.