This article has been reviewed by tax expert Erica Gellerman, CPA.
Tax season is upon us—a time that can strike fear in the hearts of small business owners everywhere. But while there’s a wealth of information out there about tax deductions for business owners in general, when you run your business out of your home, it can be far more challenging to understand how some of those policies apply when doing your business taxes.
We know that for home-based business owners, every penny saved can have a significant impact on your bottom line. That’s why we’ve created this definitive list of all the available small business tax deductions, paying special consideration to how your status as a home-based business may impact the write-offs.
Benefits and Savings Programs
Similar to the savings available to employers who provide benefits to employees, you can realize tax savings through the benefits offered to yourself and your family through your home-based business.
Here are the main ways that your home business can incur small business tax savings through different benefits programs.
1. Health Insurance Premiums
Health insurance is a big-ticket item for most small business owners. Fortunately, the IRS lets people who are self employed write off the cost of their health insurance premiums. If you are self-employed, your business has a net profit for the year, and you aren’t eligible for health insurance under an employer sponsored plan, you can use Schedule 1 of the 1040 to deduct your health insurance premiums. In the 1040 instructions there’s a worksheet that can help you calculate your total deduction.
2. Employee Education and Training
As long as you can show that the training is necessary for improving or maintaining skills needed for your business, you can deduct the cost of education and training for either yourself or your employees. Keep this in mind the next time you consider the cost of an industry conference or other networking event; it may be easier to justify these expenses if you know they’ll help to reduce your business taxes!
3. “Solo” 401(k)
If you worked for a major employer, that company likely wrote off contributions to your employee 401(k). Through a “solo,” or personal, 401(k), you can apply this same principle to your home-based business. By setting up a solo 401(k) account, you can set aside total contributions of up to $56,000 each year ($57,000 for 2020).
Operating a small business can mean a lot of finance-related costs. Fortunately, you can deduct fees and expenses that your home business racks up that you wouldn’t be able to deduct as an individual. When filing your return, make sure to account for the following finance-related tax deductions.
4. Bad Debt
There’s nothing worse than putting your best effort into work for a client who doesn’t end up paying. Unfortunately, bad debt is a nearly inevitable risk of doing business—a fact acknowledged by the Internal Revenue Service. If the amount a client owed was included in your reported gross income for either the year the deduction is being claimed or for a prior year, you can write off that bad debt on your federal tax return.
5. Banking Fees
While banking fees can’t be written off a personal tax return, business owners can take a deduction here. Banking fees include everything from fees associated with opening various accounts to those pesky ATM charges.
6. Startup Cost Amortization
Starting a business can be expensive, while you can deduct some startup and organizational costs immediately, it’s possible to instead amortize costs ratably over a 180-month period. Look at the IRS webpage on amortization for a more detailed explanation of the policy, and consult with your certified public accountant to determine whether this write-off could apply to you.
7. Collection Expenses
When a customer owes money to your business, sometimes working with a collections agency is the easiest way to get paid. While being charged money to collect what you are owed is never fun, it’s helpful to know that you can write off all expenses connected with the collection, enforcement, or settlement of debts.
8. Credit Card Fees
If your business charges customers through credit card processing, you know that those transactional fees can add up to a steep cut into your sales’ profits. Fortunately, you can deduct those fees on your business tax return, lessening the load of this necessary business expense. In addition to transactional fees, you can also write off costs associated with the credit card you use for business—including annual credit card fees or any late payment fees.
9. Cost of Goods Sold
Business owners can deduct the cost of goods sold from your gross receipts on your Schedule C. To qualify for this deduction, you need to track and value the inventory you have on hand at the beginning and end of each tax year. If you operate a service business, a similar deduction can be made for your cost of services, such as software used or subcontractors hired in order to perform the service.
10. Loan Interest
Any interest you pay or accrue during the tax year is another available deduction. The interest must be related to a business expense—if it’s for something like a car that you use for both your business and personal life, you can only deduct the percentage of that interest that correlates with the amount of time the car is used for business purposes.
From paper and pens to postage and shipping costs, small daily office expenses can add up to a major tax deduction at the end of the year. Make sure you hang on to all of those office supply receipts for tax time!
11. Office Supplies
Everything from staples and paper clips to those pricey toner and ink cartridges can be written off, as long as they’re used for a business purpose. You can also write off intangible office expenses, like fees associated with maintaining your business’ website.
Those little 55-cent stamps can total a lot of dollars over 12 months. You can write off all postage-related charges, such as stamps and postage created by postage meters. Costs associated with shipping companies like FedEx and UPS also count, and if you rent a P.O. box for your business you can include that fee, too. But costs of shipping inventory to customers can only be written off if the customer is not charged for shipping and handling.
13. Newspaper and Magazine Subscriptions
Subscriptions to newspapers and magazines can be deducted at tax time. This includes everything from trade publications to The Wall Street Journal, but you need to show they serve a business purpose.
Home Office Space
If you work from home, your “office” doesn’t need to be a separate room but rather a space dedicated to work—meaning the kitchen table or a desk where your kids do their homework does not qualify. Deductions are based on the percentage of your home devoted to business use, which you can determine by dividing the square footage of your office space by total square footage of your home.
You also have the option to skip the deductions listed below and take one simplified home office deduction.
14. Homeowner’s Insurance
While individuals are not able to write off homeowner’s insurance, those who use a portion of their home as their primary place of business can write off an equivalent percentage of their homeowner’s insurance costs.
15. HOA Fees
Business owners who live in a condominium or cooperative building, or in an area with a neighborhood association, might be eligible to deduct some of their homeowners’ association fees. This may be a small portion of your total tax bill, but every little bit adds up!
16. Janitorial Services
There’s nothing better than coming home to a clean house—especially if you can write off a portion of your cleaning service! When hiring a maid or cleaning person, remember that you can deduct a portion of their fees on your business return. Even if you opt to tidy up on your own, you can at least write off cleaning supply costs.
17. Mortgage Insurance
Mortgage insurance is something that a lot of borrowers are required by their lenders to have. When your home office is your primary workspace, you can write off a portion of the insurance fees.
18. Mortgage Interest
As a homeowner, you are able to deduct mortgage interest on your personal tax filing. Even better, if you use a portion of your home as your office, you can deduct that portion of your mortgage interest on your business filing instead.
19. Repairs and Maintenance
You can write off repairs and maintenance that are directly related to your business space. Unfortunately, renovating your kitchen doesn’t count, but building shelves or upgrading the wiring in your home office does!
Electricity, internet, heat, and hot water also qualify as part of your home expenses that can be partially deducted because of your home office. If you have a mobile phone or land line that you use for both personal and business purposes, the portion of costs associated with business calls can also be deducted.
Marketing and Business Development
No matter how good you are at the work your home-based business does, every company needs customers to survive! Fortunately, these advertising, marketing, and business development costs are all fully tax deductible, easing the burden of spending to grow your business.
21. Advertising Costs
Advertising costs can be wide-ranging, and include everything from printing business cards and hosting your website to local TV, newspaper, and radio ads. You can also deduct for promotional costs, such as the sponsorship of an industry conference, a community event, or even your kid’s soccer team!
22. Conventions and Trade Shows
Like education expenses, costs associated with attending conventions and trade shows can be deducted as long as the agenda for the convention is related to your business or role within the company. It’s important to note that conventions held outside of North America are generally not deductible.
23. Entertainment for Customers and Clients
Entertainment for customers and clients can be written off as long as it passes the “Directly-Related Test” or “Associated Test” as outlined by the IRS. Things like hunting trips or cruises typically do not meet these criteria, so check with your accountant about specific scenarios to determine what you can and can’t write off in this category.
24. Gifts for Customers
As the saying goes, a happy customer is a loyal customer. And when it comes to keeping customers happy, what can be better than a thoughtful gift? Next time you come to a major holiday, a client’s birthday, or a special anniversary or milestone in your business relationship, consider offering a small token to your favorite customer. You may deduct up to $25 per gift from your federal return.
No matter how good you are at running your business, trying to do everything on your own is a recipe for burnout. Fortunately, the money you spend on outside experts to offer business advice as well as subcontractors to help with your workload can all be added to your home business tax deductions.
25. Accounting Fees
After sitting down with your accountant to discuss all of your small business deductions, you can add one last deduction to your list: your accountant’s fees! Like other professional B2B services, all fees paid to your business’s accountant over the course of the year are fully tax deductible.
26. Consultant Fees
Working with consultants—whether for marketing, PR, operations, or some other purpose—can become a major cost of doing business. Fortunately, fees paid to consultants are fully tax deductible, meaning this investment in your business can more easily pay off in the end.
27. Legal Fees
Whether for developing service contracts or protecting your business from liability, any fees paid to a licensed attorney for ordinary and necessary business purposes may be deducted from your business’s taxable income. However, note that legal fees associated with the acquisition of business assets are typically not tax deductible.
Like consultants, the fees you pay to any subcontractors are also deductible under your cost of services or cost of goods sold. When filing your business taxes, remember to send both the individual subcontractors and the IRS a Form 1099 for each subcontractor paid more than $600 in the given tax year.
Whether it’s to attend a conference or visit a client, you can write off many of the costs associated with traveling for business. And remember, traveling for work doesn’t mean it has to be boring! If you have a reason to travel for business at a fun or family-friendly location, there’s nothing wrong with folding in a little fun along the way.
29. Airline Tickets
If you fly for any business purpose, you can deduct the cost of the airline tickets and associated fees such as baggage check costs. However, if you take your family along to turn the trip into a vacation, remember to only write off the expenses of family members who work for the business and are traveling for a business purpose.
30. Hotels and Lodging
When you’re traveling for business, all costs associated with staying in a hotel or other venue are fully tax deductible for your business. So go ahead, choose that slightly nicer hotel or stay the extra night for your next business conference. After all, you’ll get some of that money back when tax time comes around!
31. Meals While Traveling
Any and all meals you have while traveling for business can be written off at a rate of 50% of the bill. This applies both to client dinners (as long as you’re the one picking up the check) and to morning room service or a stop at the coffee shop. When traveling for business, make sure to keep all meal charges on your business credit card in order to keep track of those deductible expenses!
32. Rental Cars
Costs associated with renting a car during business travel are also fully tax deductible. This includes the rental fee and fuel costs, but again, you should only deduct costs associated with the business portion of your rental car use.
Vehicle and Transportation Expenses
Do you use a vehicle for business purposes? If so, some of the costs you put into that vehicle could be tax deductible—even if you also happen to be driving the same car back and forth to soccer practice. Here are the primary ways you can deduct costs associated with your business-related vehicle.
33. Auto Cost
Almost any cost associated with your business vehicle can be written off, including car loan or lease payments, depreciation, fuel, and insurance. If you’re also using your car for personal use, you’ll need to determine the portion of time that you’re using your vehicle for business and write off only that percentage of your vehicle costs.
In lieu of keeping track of auto costs business owners can instead use the standard mileage rate of 57.5 cents to deduct the costs of operating a car for business purposes. Since your home office is your “base” location, that means 57.5 cents per mile for travel from your home to client meetings, networking events, seminars, or any other business activity.
35. Parking and Tolls
Do you keep track of your receipts for parking fees or tolls in advance of tax season? You absolutely should, as any that are associated with a visit to a client or supplier or travel to a tradeshow or conference can be tax deductible. While these individual charges may be small, they can add up over the course of the year to major savings on your tax bill.
As you consider these potential tax deductions for your home business, keep in mind the IRS’s general guideline that an expense must be “ordinary and necessary” in order to qualify as a deduction. So while we provide this list as a starting point, it’s not a replacement for the professional advice of a certified public accountant.
Being informed about what you can and cannot claim as a small business owner is crucial to both maximizing your earnings and avoiding an audit, so please consult with your trusted advisor about all deductions before filing your return. And remember, that consultation is tax deductible!