Brilliant deduction! Tax-saving tips for the small business owner

Smart business owners know they reap bigger benefits when they focus on taxes year-round.

by Aimee M. Bissonette
updated May 11, 2023 ·  4min read

Each new year, as April 15 looms on the horizon, millions of Americans comb their records, gather receipts, and struggle to estimate the value of the second-hand clothes they donated to their local charity, all in the name of the cherished income tax deduction. For them, tax planning is a once-a-year event. Not so for the savvy business owner.

Obviously, the more tax deductions a business legitimately takes, the lower its taxable profit. The added bonus, though, is that a business owner's personal expenses often can be converted to deductible business expenses. What kind of personal expenses qualify? Consider the following.

Retirement plans

Millions of self-employed individuals and business owners qualify for government-recognized retirement plans such as Keogh plans and SEP-IRA's. Each year, they can put money into a plan toward retirement or investment goals and receive a tax deduction in the amount of the contribution.

Funding a retirement account in this fashion from your business' otherwise taxable profit is a no-brainer, and in some cases, the retirement plan can be funded as late as the extended due date of your tax return (i.e., several months into the following year).

Automobile costs

Automobile costs associated with the operation of a business (except for routine commuting) also are deductible. Businesses have two choices in this regard: keep accurate, detailed records of actual expenses as support for the claimed annual deduction, or use the IRS-approved mileage reimbursement rate.

If a vehicle is used for both business and pleasure, expenses relating to business still are deductible. Are you in the market for a newer vehicle? Why not lease a vehicle? Leasing often will produce an even higher deduction.

Business travel

Business travel provides another opportunity for deductions. Business travel expenses including airfare, lodging, phone calls, and faxes while traveling, hotel laundry service, and more may be deducted.

In addition, when it comes to travel, business owners often mix business with pleasure. That's fine. As long as the primary purpose of the trip is business, the expenses are deductible. You can even take the family. Just limit your deduction to your share of the family's expenses.

Business entertainment

Business entertainment is a proven client attraction and retention device. It is logical, then that businesses are allowed to deduct a portion of their expenses relating to entertaining present and prospective customers (e.g., treating a client to a meal in a restaurant or providing tickets to a theater production).

Currently, one-half of a business' entertainment costs may be deducted as long as "business" is discussed before, during, or after the entertainment event. As a practical matter, it helps to keep all receipts and make a note of the specific business purpose and client you entertained.

Gifts to business associates or clients (up to a specified amount) also are deductible.

Education expenses

As long as the subject matter relates to the owner's business and helps the owner maintain or improve his or her business skills, owners may also deduct education expenses, such as fees associated with seminars, classes, and conferences.

Costs associated with magazines, books, audiotapes, and videotapes necessary to the business also are deductible, as are professional associations and licensing fees. Education must be related to your current business, however. Costs relating to an educational program designed to help you land a new job are not deductible.

Charitable contributions

Charitable contributions offer another opportunity for tax deductions. Partnerships, limited liability companies (LLCs), and Subchapter S corporations that make charitable contributions often can pass the deductions relating to such contributions through to their respective business owners.

In addition to outright charitable contributions, businesses should keep a list of items they give away, along with the cost of the items. Many "giveaways" are eligible for deductions, too.

Business insurance

The cost of business-related insurance (including liability, malpractice, business overhead, and workers' compensation insurance) is deductible.

In addition, business owners with home offices often may deduct a portion of their homeowner's insurance as a legitimate business expense.

Self-employed individuals may deduct their health insurance premiums. It is important to note that disability insurance is not deductible at this point in time.

Many business owners use credit to finance their business purchases. When they do, the interest and related charges (including credit card annual fees) are fully tax-deductible. This is true even if the financing vehicle is a personal loan. As long as the loan proceeds are put into the business, the interest expense is deductible.

Office supplies & expenses

A whole host of miscellaneous office supplies and expenses are deductible. Paperclips, postage, even the money kept in the petty cash box are deductible. Is caffeine a mainstay in your working life?

Costs relating to coffee and beverage services are deductible. Do you need office equipment? Consider whether it is smarter to buy or rent. The rules relating to deductions for purchased equipment vary, but equipment rental costs are fully deductible.

Lastly, don't forget that the fees paid to lawyers and consultants are deductible. The fees of lawyers, accountants, bookkeepers, and other professionals are considered a cost of doing business. Smart business owners know the value of seeking (and paying for) such expert advice. Excellent advisers help produce excellent business results.

So what are you waiting for? Organize those receipts. But whatever you do, ask your accountant just how many of these deductions you can take advantage of in your business.

After all, the accountant's fees are deductible.

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About the Author

Aimee M. Bissonette

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This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.