7 Tax Deductions Small Business Owners Often Miss

Stop leaving money on the table. Small business owners often miss out on tax deductions that could save them thousands. Here are seven key deductions you might be overlooking:

1. Home Office Deduction: Claim up to $1,500 if you use a dedicated space in your home for business.
2. Vehicle and Mileage Costs: Deduct business-related travel using either the standard mileage rate or actual expenses.
3. Training and Education: Write off courses, certifications, and workshops that improve your business skills.
4. Qualified Business Income (QBI): Pass-through entities can deduct up to 20% of their net income.
5. Retirement Plans: Contribute to plans like a Solo 401(k) to lower taxable income and save for the future.
6. Health Insurance: Deduct 100% of premiums if your business income exceeds the cost of coverage.
7. Equipment Depreciation: Use methods like Section 179 or Bonus Depreciation to write off business equipment.

Quick Tip: Keep detailed records for all expenses, including receipts, mileage logs, and invoices, to ensure compliance and maximize savings. Consult a tax professional to tailor these deductions to your business.

1. Home Office Space Deductions

If you have a specific area in your home that you use only and regularly as your main place of business – whether you own or rent – you may qualify for the home office deduction under IRS guidelines.

The IRS has a broad definition of "home." It includes houses, apartments, condos, mobile homes, detached structures (like a shed or garage), and even boats, as long as they’re used as primary residences.

You can choose between two calculation methods:

• Simplified method: $5 per square foot, up to 300 square feet (maximum deduction of $1,500).
• Regular method: Based on actual expenses like mortgage interest, rent, utilities, insurance, and repairs, with no cap. This option might be better if your home-related costs are high.

Who’s Eligible?

This deduction is available to self-employed individuals or small business owners. To qualify:

• The space must be your primary business location.
• It can also qualify if you use it for administrative tasks or inventory storage, especially if you don’t have another fixed business location.

Common Mistakes to Avoid

• Overestimating square footage: Only include the area used exclusively for business.
• Mixing personal and business use: Shared spaces don’t qualify.
• Poor recordkeeping: Keep detailed records of expenses and how the space is used.

If you’re using the regular method, calculate your deduction by applying the business-use percentage to costs like rent, utilities, and repairs.

Up next, learn how vehicle and mileage deductions can help reduce your tax burden even further.

2. Vehicle and Mileage Costs

You can lower your taxable income with vehicle-related expenses using two IRS-approved methods: the standard mileage rate or the actual expense method.

Standard Mileage Rate Method

The IRS determines a standard mileage rate each year, which accounts for costs like depreciation, lease payments, fuel, maintenance, insurance, and registration.

Actual Expense Method

This method allows you to deduct actual vehicle expenses, including fuel, insurance, repairs, registration fees, and depreciation.

Vehicle Depreciation Options

When it comes to depreciation, there are a few options to consider:

• Section 179: Deduct up to $10,200 for vehicles under 6,000 lbs or up to $26,200 for vehicles weighing between 6,000 and 14,000 lbs.
• Bonus Depreciation: Allows an $8,000 cap for vehicles under 6,000 lbs, while vehicles between 6,000 and 14,000 lbs are not capped.
• MACRS Depreciation: Follows a standard depreciation schedule for all vehicles.

Qualifying Business Mileage

You can deduct mileage for business-related travel, such as:

• Trips between different work locations
• Client meetings outside your regular workplace
• Runs to pick up supplies
• Visits to the bank for business needs
• Travel to conferences or training sessions

Note: Commutes between your home and primary workplace are generally not deductible.

Record-Keeping Requirements

To claim these deductions, ensure you keep thorough records, including:

• Mileage for each business trip
• Date and destination
• Purpose of the trip
• Names of individuals met (if applicable)
• Total annual mileage (both business and personal)

Using a mileage tracking app can make this process easier and more accurate.

Pro Tip: If your vehicle is used only for business, you might be able to deduct 100% of its operating costs, though IRS limits apply. For most business owners who use their vehicle for both personal and business purposes, expenses should be allocated based on actual usage.

Next, let’s dive into the rules for the Qualified Business Income deduction.

3. Training and Education Costs

You can deduct training and education expenses approved by the IRS if they are directly related to maintaining or improving skills needed for your business. To qualify, these expenses must be considered ordinary, necessary, and directly tied to your work. These deductions work alongside home office and travel write-offs to help lower your overall tax liability.

Qualifying Education Expenses

For education expenses to be deductible, they must directly enhance or maintain skills required for your current job or business.

Here are some common deductible expenses:

• Tuition and registration fees for courses
• Required textbooks, materials, and lab fees
• Travel and transportation costs for temporary training locations
• Fees for professional certification or license renewals
• Workshops or conferences focused on technical or industry-specific skills

Employee Education Programs

If you offer a qualified educational assistance program, you can deduct up to $5,250 per employee each year. Any amount over this limit is taxable unless it qualifies as a working-condition fringe benefit.

Documentation Requirements

To support your deductions, keep the following records:

• Invoices or receipts for expenses
• Course descriptions or syllabi
• Certificates of completion
• Employee records showing the training’s connection to their job duties

Nonqualifying Expenses

Not all educational expenses are deductible. Here are some that don’t qualify:

• Training for a new trade or profession
• Courses unrelated to your current business or job

Practical Examples [14]

• A restaurant owner pays for chefs to attend specialized culinary workshops.
• A freelance graphic designer takes an advanced course on new design software.
• Industrial workers complete OSHA-required safety training.

Pro Tip: If you’re self-employed, report these expenses on Schedule C. Employees can itemize them on Schedule A, but only if they exceed 2% of adjusted gross income (AGI).

Next, we’ll dive into the rules for the Qualified Business Income deduction.

4. QBI Deduction Rules

The Qualified Business Income (QBI) deduction allows pass-through entities to deduct up to 20% of their net business income.

Who’s Eligible

You might qualify for this deduction if your business operates as one of the following:

• Sole proprietorship
• Partnership
• S corporation
• Certain trusts and estates

Income Thresholds for 2024

Here’s how the deduction works based on your taxable income:

• Single filers:
  • Up to $191,950: Full 20% deduction
  • $191,951–$241,950: Partial deduction for Specified Service Trades or Businesses (SSTBs)
  • Over $241,950: No deduction
• Married filing jointly:
  • Up to $383,900: Full deduction
  • $383,901–$483,900: Partial deduction for SSTBs
  • Over $483,900: No deduction

What Doesn’t Count as QBI

Not all business income qualifies for this deduction. Exclusions include:

• W-2 wages paid to employees
• Guaranteed payments to partners
• Salaries paid to S corporation shareholder-employees

Special Rules for Service Businesses

If your business falls under the category of a Specified Service Trade or Business (SSTB) – such as healthcare, law, accounting, consulting, financial services, athletics, or performing arts – the deduction phases out once your taxable income exceeds the thresholds mentioned above.

The QBI deduction can work alongside other tax breaks like home office, vehicle, and education-related write-offs to reduce your tax bill. To make the most of it, keep detailed records of your income and expenses. Consulting a small business tax expert can help you maximize your deduction and stay compliant with tax laws. Don’t forget – the QBI deduction is set to expire after 2025, so plan ahead to take full advantage of it.

Next, let’s dive into how business retirement plan deductions can further reduce your taxable income.

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5. Business Retirement Plans

Contributing to retirement plans offers immediate tax benefits and helps build long-term financial security.

Retirement Plan Options and Contribution Limits

• Solo 401(k): Allows elective deferrals up to $23,000 (or $30,500 if you’re 50 or older), plus employer contributions up to 20% of your net self-employment income. The total contribution limit is $69,000, or $76,500 if you’re 50 or older. These contributions reduce your taxable income.
• Traditional 401(k): Employers can deduct contributions up to 25% of eligible employee compensation, capped at $285,000. This also lowers taxable income.
• Plan Setup Costs: Employers can deduct fees for setting up and administering retirement plans. Small businesses may qualify for a tax credit of 50% of setup costs, up to $5,000 annually for three years. Adding auto-enrollment can provide an extra $500 annual credit for three years.

Contributions must generally be made by your tax return’s due date, including extensions. However, Department of Labor-regulated plans may have earlier deadlines for salary deferrals.

6. Business Health Insurance

Health insurance premiums are another major tax deduction for self-employed business owners, right after retirement plan contributions. Sole proprietors, partners, and LLC members can deduct 100% of their premiums as long as their net business income is greater than the premium costs.

Eligibility Requirements

• Your net business income must be higher than your premium costs.
• You can deduct premiums for any policy paid through your business, even if the policy is in your name.

"Your health Insurance is 100% deductible. This is especially powerful for the small business owner. Hence, this is a huge benefit for small and medium sized business owners. Something… that American’s without a side-hustle (or business) can take advantage of."

• Chris Landqvist, Managing Partner at Weston Tax Associates.

Deduction Rules by Business Structure

• Sole Proprietor/Single-Member LLC: Report premiums on Schedule 1, Line 16 of Form 1040. Your net income must exceed the cost of premiums.
• S Corporation: Premiums are included in Box 14 of your W-2 form. Your W-2 wages must be higher than the premium costs.
• C Corporation: Premiums are deducted as a business expense, but the employer must cover at least 50% of full-time employee premiums.

Additional Tax-Saving Options

You can save even more by using HSAs (Health Savings Accounts), HRAs (Health Reimbursement Arrangements), or the Small Business Health Care Tax Credit. The tax credit is available for businesses with fewer than 25 full-time employees earning an average wage of less than $53,000.

Benefits of Employee Coverage

If your business offers group health insurance, you can deduct the full cost of premiums as a business expense. Employees who contribute toward their premiums often do so pre-tax, which lowers payroll tax liability for both the employer and employees.

Next, we’ll dive into how equipment depreciation can further reduce your tax burden.

7. Equipment Depreciation Options

In 2024, small business owners can deduct equipment costs using Bonus Depreciation, Section 179, MACRS, or the straight-line method.

Key Depreciation Methods

Bonus Depreciation: This method allows you to deduct 40% of eligible equipment costs in the first year (2025). The percentage drops to 20% in 2026, with a full phase-out by 2027.

Section 179: You can immediately write off up to $1,250,000 of qualifying equipment purchases in 2024. However, this benefit starts to phase out if your total equipment additions exceed $3,050,000. Your deduction is also capped by your taxable business income.

"When you buy a heavy vehicle for your business, choosing the right depreciation method can significantly impact your taxes." – CL, WTA

Pick the method that aligns with your cash flow and tax situation.

For more insights, check out our Tax Deduction Quick Reference to compare these equipment deductions with other key write-offs.

Tax Deduction Quick Reference

Here’s a handy summary of seven tax deductions you might be eligible for:

Keep these details in mind when organizing your records, and consult your tax advisor to make the most of these deductions.

Next Steps

Set up a reliable year-round system to keep track of all your deductions. Staying organized ensures you don’t overlook any potential write-offs. Here’s how you can manage your records effectively:

• Collect and store receipts for expenses like meals, office supplies, travel, and professional services.
• Keep a detailed mileage log, including dates, destinations, and the business purpose of each trip.
• Document your home office setup by noting the square footage and taking photos.
• Save invoices and certificates related to training and professional development.
• Hold onto health insurance premium statements and records of employee benefits.
• Keep proof of equipment purchases.
• For business meals, jot down the attendees and the purpose directly on the receipt.
• Track software subscriptions and other recurring fees.
• Record interest payments on business loans and credit cards.

These records not only back up your deductions but also offer protection in case of an audit.

Consider booking a consultation with Weston Tax Associates to determine whether standard or itemized deductions work best for you. They can also help identify any deductions you might have missed. Regular check-ins with an advisor can help you stay compliant and make the most of your tax savings.

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Chris Landqvist

Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.