Top Tax Deductions Small Business Owners Often Miss
Running a small business comes with a myriad of responsibilities, and while taxes are a major consideration, many small business owners overlook valuable deductions that could save them significant money. Maximizing your tax deductions not only reduces your taxable income but can also help your business thrive by reinvesting those savings back into operations. In this post, we’ll cover the top tax deductions small business owners often miss, ensuring you can take advantage of every opportunity available to save during tax season.
1. Home Office Deduction
One of the most commonly overlooked deductions is the home office deduction, especially for entrepreneurs who work from home. If you use a portion of your home exclusively for business, you can deduct related expenses such as rent, utilities, and maintenance. The IRS offers two methods for calculating the deduction: the simplified option, which allows for a deduction of $5 per square foot (up to 300 square feet), or the regular method, where you calculate the percentage of your home used for business and apply it to actual expenses. This deduction can significantly lower your taxable income if you meet the requirements.
2. Business Mileage
Many small business owners use their personal vehicles for business purposes but fail to track their mileage accurately, missing out on the valuable business mileage deduction. Whether you're driving to meet clients, attending conferences, or running business-related errands, you can deduct the standard mileage rate of 65.5 cents per mile (as of 2023). Be sure to maintain a mileage log or use an app to track your trips, as this deduction can quickly add up and provide substantial savings, especially if driving is a regular part of your business operations.
3. Office Supplies and Equipment
Another often overlooked deduction involves office supplies and equipment. From paper and printer ink to computers and software, these expenses are fully deductible if they are used exclusively for your business. Many small business owners neglect to track smaller purchases, assuming they don’t matter. However, over the course of a year, these minor expenses can accumulate into a significant deduction. Additionally, larger equipment purchases may qualify for a Section 179 deduction, allowing you to write off the entire cost of the asset in the year it was purchased rather than depreciating it over several years.
4. Business Meals
While many business owners assume meals are not deductible, the IRS allows a 50% deduction for meals directly related to conducting business. This can include taking a client out to lunch, a meal during a business trip, or even a staff lunch. To take advantage of this deduction, make sure you document the time, place, and purpose of the meal, as well as who attended. Keeping receipts and notes will ensure that you’re prepared if the IRS ever questions the legitimacy of the deduction, allowing you to maximize savings in this often-underutilized category.
5. Health Insurance Premiums
Small business owners who pay for their own health insurance can deduct the premiums they pay for themselves, their spouse, and their dependents. This deduction is especially valuable because it reduces your adjusted gross income, which can result in additional tax savings. However, to claim this deduction, your business must have a net profit, and you cannot be eligible for health insurance through a spouse’s employer. For sole proprietors and small business owners who pay for their own coverage, this deduction can be a significant money-saver.
6. Retirement Plan Contributions
Small business owners can also take advantage of tax deductions by contributing to retirement plans like a SEP IRA, SIMPLE IRA, or Solo 401(k). Not only do these contributions help you save for the future, but they also reduce your taxable income. For example, contributions to a SEP IRA can be as high as 25% of compensation or $66,000 (for 2023), offering significant tax savings for high-earning business owners. Setting up and contributing to a retirement plan is not only smart for your future financial security but also a valuable tax strategy.
7. Startup Costs
If your business is relatively new, you can deduct up to $5,000 in startup costs and $5,000 in organizational costs in the first year of operation. Many new business owners miss this deduction because they don't realize it covers a wide range of expenses, including market research, advertising, and even legal fees associated with setting up the business. If your startup costs exceed the $5,000 limit, you can amortize the remaining expenses over 15 years, spreading the tax benefits over a longer period.
By taking advantage of these commonly overlooked tax deductions, small business owners can significantly reduce their taxable income and save money during tax season. Whether you’re running your business from home, tracking mileage, or investing in equipment, these deductions can make a real difference to your bottom line. Be sure to keep detailed records and consult with a CPA to ensure you’re maximizing every available deduction and keeping more of your hard-earned money.