7 Best Small Business Tax Deductions

Wage Optimizer

Whether your small business is an S-Corp, LLC, or sole proprietorship, identifying and tracking tax deductions should be an integral part of your tax planning strategy. The following 7 tax deductions are the most common and generally the most lucrative deductions for a small business employee owner to take. It is important to note that all deductions, without exception, should be substantiated with some sort of record, and a receipt on it’s own is not always enough. In this post I’ll provide some handy guidance that will get you on the right track to legally and defensibly maximizing your deductions.

This post focuses on deductions that are not normal expenses of doing business. For more information on general business expenses, meals expenses, and vehicle expenses, please see our earlier post S Corporation Business Expenses “How To” Guide.

Costs of Going Into Business

If your business produces taxable income in the first year of operation, you may want to consider taking a special one-time deduction (called a Section 195 deduction) for business start-up expenses. This deduction is only available for the first year of business operation and can only be taken if 1) you are actually in business by the end of the tax year and 2) the expenses are incurred before the business is opened and are not capital equipment. With this deduction you are able to immediately expense up to $5,000 of business setup costs that would normally be capitalized over 7 years according to current IRS rules. In other words, you will able to deduct $5,000 immediately against first year revenues instead of depreciating those costs over 7 years. This can be very helpful for the small business owner who pays for investigatory costs (such as market research or analysis) or preopening costs (such as advertising, salaries and wages paid for training, travel to arrange vendors, etc), allowing them to write-off and thus reduce taxable income for their first year’s operations by up to $5,000. To keep track of start-up expenses, it is generally enough to simply keep categorized itemized receipts.

It is also important to note that most small business owners will want to consider Section 179 deductions for capital equipment in the year in which the equipment is purchased. Section 179 deductions do not affect or count towards the $5,000 limit on deducting start-up costs. A good resource for understanding Section 179 deductions is located at http://www.section179.org/.

Costs of Information – Books, Subscriptions, and Education

Most costs associated with obtaining and understanding information in the course of your business are deductible. This can include purchases of business books (or auto mileage to and from the library), subscriptions to business related publications such as newspapers or magazines, or even business related education such as college courses or workshops. Education need not be from an accredited provider, but if it is, small business owners may be able to write-off all costs associated with obtaining advanced degree or professional certificate as current-year business expenses. In order to defensibly deduct business expenses for information, it is advisable that whatever expense is being written off is easily associated with the activities of the business taking the write-off. Also note that education for work unrelated to the existing business is generally not deductible. For example, a mechanic paying for additional education that enables her to work on more makes and models of vehicles should be perfectly acceptable for deduction. However, that same mechanic paying for courses preparing her to become an accountant would not necessarily qualify for deduction.

Interest Paid for Financed Business Purchases

Interest paid for any form of financing for business purchases is fully deductible. This means that all interest incurred on the proceeds from a loan that is used to pay for business expenses is deductible. The same logic applies to credit cards – any interest paid to a credit card issuer that is incurred on purchases made for your business is also fully deductible. It is typically a good idea to keep a separate business credit card that is used solely for business expenses so that keeping track of interest incurred on business purchases is easier.

Home Office Deduction

The home office deduction is one of the most commonly unused deductions because it has long been perceived as an “audit flag”. With more and more businesses operating out of the home, the deduction is now becoming more popular, and the IRS has made it easier to claim the deduction by introducing a simplified calculation. The main requirements for qualifying for the home office deduction are 1) the home office must be used regularly and solely for the purpose of conducting business and 2) the home office must be your principal place of business or have another acceptable business use. For example, an office (or office area) with a desk, desk chair and computer that you use solely for business is perfectly acceptable to base the deduction on. An office in a guest room that doubles as your daughter’s computer area for homework is not.

Self Employment Taxes (Employer Portion)

The self employment tax deduction is one of the most easily understood tax deductions. When you pay yourself as a small business owner, you must pay the employer portion of social security and medicare taxes in addition to the personal portion. Anyone who has ever received a paycheck knows that social security and Medicare taxes are taken off the top of their earnings at 6.2% and 1.45% respectively, totalling 7.65%. However, many people are unaware that the employer must also pay an additional 6.2% and 1.45%, such that in total the IRS receives 15.3% of each employee’s earnings. When you pay yourself, you must pay both the personal and the employer portion of these taxes. The silver lining is that at least the employer portion of the tax paid is fully deductible as a business expense, and there is little burden of proof for the business owner to take the deduction (as long as the SE taxes are paid to the IRS, there is a record of the payment).

Legal and Professional Fees

Setting up a new business can be tricky, and taxes get complicated quick, so most small business owners, especially employee owners of S Corporations, tend to have significant expenses related to legal advice and accounting fees. These expenses are deductible in full. Keep all invoices you receive for these fees, and ask for itemized invoices when possible.

Other Fees

Don’t forget to keep track of the little fees that are charged to you business; they are fully deductible, too. For instance, these may include credit card fees (late fees, annual fees and application fees all count), bank fees for checks or services, membership fees, or even ATM fees. Keep track of these fees and you’ll be surprised at the write-off amount come tax time.


As small business owners, we all know that holding on to our earnings can be tougher than when we’re someone else’s employee. Use the deductions described in this post to help minimize your tax liability and keep more of your hard-earned dollars in your pocket. And always keep a record of your expenses; it’s worth the hassle in the end. Additionally, check out a few of the many online applications now available to help you keep track of expenses throughout the year, so you don’t walk in to your accountant’s office next January with another shoebox full of receipts.

Additional Resources

Professional Association of Small Business Accountants: Understanding the Small Business Start-Up Deduction

IRS: Internal Revenue Bulletin 2013-52 (Notice of Proposed Rulemaking – Partnerships; Start-up Expenditures; Organization and Syndication Fees)

IRS: Electing the Section 179 Deduction

IRS: Home Office Deduction

IRS: Simplified Option for Home Office Deduction

Intuit: Top Tax Write-offs for the Self-Employed