If you recently flexed your entrepreneurial muscle, you’re in good company. According to the U.S. Census Bureau, Americans filed 5.4 million new business applications last year. If you’re among them, there’s a good chance that you’re going through the process of filing taxes as a business owner for the first time.
As a business owner, there are many types of expenses you can write off — either partially or in full. So what can you deduct as a small business owner? Here are some categories to look at.
Common tax deductions for small business owners
General business expenses
The IRS allows business owners to deduct an expense so long as the item in question is both:
Ordinary: Something that your industry typically uses or needs.
Necessary: Something that is considered appropriate for your specific business.
As a catch-all category, general business expenses often include items such as:
Wages for employees
Many employee benefits, including health insurance and qualified retirement plans
Rent for office space
Technology, such as software programs, subscriptions or computer upgrades
Business licenses or regulatory fees
Advertising and promotional expenses, such as websites, social media listings and business cards
While it's advantageous that many items can be deducted, you’ll need to keep excellent track of what you spent. “Every tax deduction is very valuable, so make sure your bookkeeping is in order,” says Gail Rosen, a certified public accountant in Martinsville, N.J.
In addition, you’ll need to know the timing of when you incurred each expense. “It can be easy to forget when you bought that computer or phone since these expenses are often paid for using a credit card,” says Crystal Stranger, an enrolled agent in Grandville, Mich. Be sure to keep a running tally along with the actual receipts — a credit card bill alone won’t be sufficient documentation since it’s not itemized.
While you might think you can only write off your day-to-day business expenses, you can also deduct expenses that came before you officially launched your business. That said, there are some rules. “Many small businesses assume they can deduct all their costs in starting a new business, but they cannot do so until they have their first sale,” Rosen says. “Costs are then deductible based on the laws for that deduction."
A room must be used “exclusively and regularly” for business to be considered a home office — just putting a desk in your child’s playroom doesn’t count in the eyes of the IRS. You also won’t be able to take the credit if you are renting an office elsewhere, Rosen says.
The easiest way to do this is to take the simplified home office deduction, which allows you to deduct $5 per square foot of your dedicated home office space, up to 300 square feet. The other option (which is more complicated but possibly more lucrative) is to determine the percentage of your home that you use for your business needs and then calculate the actual costs of mortgage interest, depreciation and insurance for that specific area.
Phone and internet
Few people have dedicated business cellphones anymore, which can make this expense more difficult to calculate. “These days, most telephone and internet plans are flat-rate, so it's really impossible to allocate unless you have a plan used primarily for business purposes,” Stranger says. If you do want to try and determine a percentage, ask your carrier for an itemized bill to see how many of your minutes are devoted to business use.
While you can’t deduct your commute to your office (especially if it’s a home office), if you drive to visit clients or to make deliveries, you’ll want to account for these expenses. You can deduct 56 cents per mile for 2021 business travel (note that the IRS announced an increase to 58.5 cents for 2022). Like the home office deduction, there is a more complicated method for tracking actual expenses related to use of automobiles that is more intensive. Regardless of which method you choose, it is a good idea to keep a mileage log, documenting the date, the number of miles you traveled, and the purpose behind the business travel.
To be successful as a business owner, you may need to keep up with your industry. In many cases, anything related to continuing education counts as a business expense, including:
Dues paid to a professional association
Subscriptions to news sources that are relevant to your business
Online classes that apply to your business
If you took a client out for a meal or ordered lunch for your staff, you’re in luck: Business meal expenses made between Dec. 31, 2020 and Jan. 1, 2023 are 100 percent deductible — a temporary change from the previous rule, which capped the deduction at 50 percent. However, this only applies to food and beverages purchased from a restaurant — if you purchased snacks to stock your office kitchen, you’ll still only be able to deduct 50 percent of the costs.
You probably didn’t do much business travel last year. But if you took advantage of flexible work arrangements and combined business and leisure into one trip (a trend known as "bleisure travel”), know that an extra spa day or flight for your spouse isn’t deductible. To be a deductible expense, the primary purpose of the trip needs to be for business. Note that the rules are complicated when blending, so work with a tax professional to ensure you are getting the biggest deduction.
This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.
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