7 Business Tax Deductions You Can't Afford to Overlook

7 Business Tax Deductions You Can't Afford to Overlook

Even if you operate as a sole proprietor—and pay business taxes as part of your income—don't overlook some potentially hefty business-tax deductions.

by Greg Lindberg
updated September 22, 2020 · 3 min read

If you're planning to open a daycare, start a marketing firm for local restaurants, or dive into any formal business venture, the expenses you'll incur to pursue such work on your own can make your head spin.

But if you look on the bright side, you'll discover a long list of costs you can deduct when filing your income taxes with the IRS. The following are seven business tax deductions you simply can't afford to overlook.

1. Startup Costs

Entrepreneurs are often faced with a lengthy list of initial expenses they must cover to properly build the foundation of a new business. Fortunately, business owners are able to claim tax deductions on some of these expenditures. The IRS refers to this category of expenses as a company's startup costs.

You can deduct up to $5,000 of the startup costs you incur, which may include business registration fees, equipment, and marketing expenses to throw a grand-opening party. The difference that exceeds the $5,000 limit can be deducted over time.

2. Operating Expenses

After you've launched your business and are now part of a specific industry, your entrepreneurial expenses have only just begun. So, the IRS lets you claim your operating expenses as deductions on your tax return.

While you may write off a number of products and services as one-time tax deductions, you may want to depreciate more expensive purchases over the course of several forthcoming tax years.

Operating expenses include the utilities in a brick-and-mortar store, the cost to buy products, and manufacturing expenses. Each industry has its own unique expenses, so the specific deductions will vary from one business owner to another.

3. Vehicle Expenses

Many business owners spend time on the road to meet with clients in different locations or to pick up a new batch of supplies. Whatever your intentions may be when you're in the fast lane, you can take advantage of the business vehicle deduction.

This write-off comes with two options: deducting the mileage you drive or your actual vehicle expenses. A standard mileage rate—54 cents per mile for 2016—must be taken on business miles traveled as a deduction. Actual expenses can include gas, oil, vehicle maintenance, and insurance. Remember that you can only choose one of these business vehicle tax deduction options—not both.

4. Travel Costs

In addition to using a personal vehicle, many entrepreneurs travel by plane, train, bus, rental car, or via a ride-sharing service. So long as these transportation activities are directly related to doing some type of business, such as meeting with a potential client, then they are fully deductible.

5. Home Office Expenses

If you run your business entirely out of your home, or you perform some business-related tasks in your residence, you're likely eligible to take tax deductions on them.

With two options available, you can deduct either a percentage of your home expenses for business reasons, or you can take a flat rate write-off of $5 per square foot for a maximum deduction of $1,500 for up to 300 square feet of home office space. Remember to designate a specific area of your residence for business use. Document all relevant business expenses, and keep solid records.

6. Health Insurance

If you work for yourself, you likely pay your own health insurance premiums for medical care. If you are married or have children, there's a good chance you pay for their healthcare coverage, too.

If you have a business and show a net profit for a particular year, you may qualify to claim the self-employed health insurance deduction. This is categorized as an adjustment to your income for health insurance premiums you pay. This includes any coverage for your spouse or dependents. You can generally claim 100% of your paid health insurance premiums as a tax deduction.

7. Meals and Entertainment

Perhaps you will enjoy some meals or entertainment events with business partners, clients, or employees. If you discuss business during such an activity, you can deduct 50% of the bill. Always save receipts and write down who was present and what business you discussed. This may not seem like a big deduction, but it can add up quickly over time.

Educating yourself about these and any other business tax deductions to which you may be entitled is an important step in growing your business and profitability.

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Greg Lindberg

About the Author

Greg Lindberg

Greg Lindberg is Editor-in-Chief at 1-800Accountant, the nation's leading tax and accounting firm for small business own… Read more