1. Mileage Deductions
If your business involves transporting goods or moving between different locations for work — whether you’re a mobile dog groomer or a real estate agent — your business mileage should be deductible.
In the US, there are two primary methods for deducting vehicle expenses for business use: The actual expense method and cents-per-mile (CPM)
The actual expense method involves deducting the actual costs of operating a vehicle for business purposes. This includes tracking expenses such as fuel, maintenance, repairs, tires, insurance, registration fees, licenses, and depreciation. The method requires detailed recordkeeping and quite a bit of math to calculate the percentage of total vehicle for business purposes. This percentage is then applied to the total actual expenses to determine the deductible amount.
CMP is a more straightforward method with limited recordkeeping. In this method, business owners only need to track the number of business miles driven and multiply it by the standard mileage rate (67 cents per mile in 2024) to determine the deduction. The rate is updated annually to reflect the changes in gas prices, insurance, inflation, and other variables.
See our guide for a full comparison of the two methods.
Regardless of the method you choose, your team should track business mileage and record key details about each trip, including purpose and destination. To make this process effortless, you can use a mileage-tracking app like MileIQ.
2. Office expenses
The next category on our list can surely be considered ordinary and necessary for almost any business. To maintain an office space or any brick-and-mortar location, a business can deduct expenses like rent, utilities, office supplies, furniture, and any other expense considered necessary for your industry.
Keep this “necessary and ordinary” rule in mind when making more aesthetic purchases, like say artwork for your office. The purchase can be deductible if a piece of art or a plant is used to create a professional atmosphere in a client-facing area or to improve the overall environment.
However, if the artwork is primarily for the personal benefit of the business owner or an employee, it isn’t deductible — especially if it’s placed in a private or home office. The same goes for more expensive paintings, sculptures, and other luxury items. In that case, artwork can be considered a capital asset and may be subject to capital gains tax upon sale rather than being expensed or depreciated as a business asset.
3. Travel expense deductions
Small businesses can deduct expenses related to work travel, including airfare, lodging, meals with clients (up to 50% of the cost), and trade show or conference fees.
However, IRS regulations require business travel to be purely motivated by a business purpose, so you can’t deduct expenses from your vacation, even if you managed to land a new client during a trip.
While you’re booking accommodations, remember that lavish or extravagant expenses are not deductible. This includes luxurious hotels, meals, or other costs that exceed what is reasonable under the circumstances. For instance, choosing a five-star hotel when a standard business hotel would suffice may be deemed excessive and thus non-deductible.
4. Business property deductions
As a small business owner, you can deduct expenses for purchasing and maintaining business property, such as buildings and land. These expenses include mortgage interest, property taxes, and depreciation.
These deductions can significantly reduce your taxable income, making it more affordable to invest in property essential for your operations.
However, if you’re using a part of the property for personal reasons, you may not deduct the full amount. For mixed-use properties, only the business-use portion can be deducted. That means you need to constrain business-related activities to the business portion of your property and keep purchases and expenses for business use, like furniture and repairs, separate.
Similar to luxury office equipment, it’s also worth remembering that luxury furnishings or high-end decorations that aren’t essential for the business may be considered extravagant and non-deductible.
5. Equipment deductions
Any expenses related to the equipment necessary for your business are deductible, whether you’re buying or renting them. Here are some of the most common types of equipment that small businesses deduct:
- Computers and related accessories: Computers, laptops, keyboards, printers, and cables can be valid business expenses for almost any business. However, you should remember that buying a high-end computer with an advanced graphics card may not be deductible if you run an accounting firm — you’d have a hard time justifying the purchase as necessary.
- Office furniture: Desks, chairs, filing cabinets, and other office furniture used on the business premises are deductible.
- Machinery and tools: Equipment and tools are deductible business expenses as long as they’re related to your business and industry. For example, a construction company can deduct the cost of power tools, heavy machinery, and safety equipment, but a software company may not be able to validate such expenses.
- Specialized equipment: The same applies to machinery and tools. For example, a dental practice can deduct the cost of dental chairs, X-ray machines, and other dental tools, while a gym can deduct all sorts of exercise equipment.
Whenever you’re buying new equipment for your business, it’s always worth noting that anything that’s primarily used for personal purposes is not deductible.
For instance, buying a high-end camera because you enjoy taking photographs on your lunch walks would likely not qualify as a business expense (unless you use the photos exclusively for marketing purposes or something else that relates specifically to your business).
6. Supplies and inventory deductions
Small businesses can deduct the cost of goods sold (COGS) and supplies used in their operations in a tax year. The types of supplies and raw materials that can be deductible highly depend on the industry and type of business.
For a furniture manufacturer, it can be wood, screws, and nails, and for a clothing manufacturer, it can be all sorts of textiles. As long as the materials and supplies are used entirely for the business, they’re 100% deductible.
7. Professional services deductions
Fees paid for legal, accounting, consulting, and other professional services are also deductible. These services are usually considered essential for business operations and planning, and there’s rarely doubt about their ordinary and necessary nature.
An exception to that rule is when you’re hiring an accountant or legal advisor for matters unrelated to your business. In that case, expenses shouldn’t be accounted for, and you should only pay them from your personal budget.
8. Insurance deductions
Premiums for business insurance policies, such as liability, property, and health insurance for employees, are generally considered valid business expenses and are deductible.
Here are some examples:
- Business liability insurance for injuries, property damage, professional errors, etc.
- Property insurance for buildings, equipment, and inventory against risks like fire, theft, and natural disasters.
- Workers' compensation insurance that provides benefits to employees who suffer job-related injuries or illnesses.
- Health insurance for employees that may include coverage for medical, dental, and vision care.
- Business interruption insurance that covers the loss of income due to a temporary shutdown of business operations caused by a covered event, like a natural disaster.
- Vehicle insurance premiums for vehicles used exclusively for business purposes.
9. Start-up expenses
Start-up expenses are often incurred before the business is open or profitable, which is why the IRS lets you (partially) recover them.
The best examples of such costs are market research, legal advice, and consulting. These expenses need to meet two conditions to be deductible.
- The cost could be deductible in an active business in the same field (this is similar to the ordinary and necessary rule)
- The cost was incurred before the business became active (before formal opening day).
Up to $5,000 of startup costs can be deducted in the first year of business, with the remaining expenses amortized over 15 years.
10. Pass-through deduction
The pass-through deduction, established by the Tax Cuts and Jobs Act, allows eligible small business owners to deduct up to 20% of their qualified business income (QBI) from sole proprietorships, partnerships, and S corporations.
To qualify, the income must come from engaging in business activities (profit from selling goods or services) not from capital gains, dividends, or interest. This provision aims to support small businesses by lowering their overall tax burden.
11. Net operating loss deduction
This type of deduction is often overlooked, but it’s worth knowing about it in case your business has a slower year. The net operating loss (NOL) deduction allows you to carry forward losses from one tax year to offset taxable income in future years.
For example, let’s say you had $50,000 net operating loss in one year, and your taxable income is $100,000 the next year. In that situation, you can use the $50,000 NOL to reduce the $100,000 taxable income, effectively lowering your tax liability for that year. If there is remaining NOL after applying it to taxable income, it can be carried forward to subsequent years.
You can find the exact instructions for using this deduction on the official IRS website.
12. Self-employment taxes
While this category on our list isn’t exactly aimed at small businesses, it’s still worth mentioning if any self-employed individuals stumbled upon this article. This deduction acknowledges that solopreneurs and contractors are responsible for both the employee and employer portions of Social Security and Medicare taxes and allows them to get a tax break.
If you’re self-employed, you can deduct the employer-equivalent portion of your self-employment tax (50%), which covers Social Security and Medicare.
13. Employee compensation
Salaries, wages, and benefits paid to employees are standard, valid expenses for any small business. This includes contributions to retirement plans, sick leave, and health insurance.
However, it’s still worth remembering that compensation must be reasonable and based on the actual business relationship with an employee. Here are a few examples of compensation that the IRS may disqualify:
- Personal benefits: Costs associated with personal benefits that are not primarily for business purposes, such as personal use of a company car or country club memberships, may not be fully deductible. These should be properly allocated between business and personal use.
- Fines and penalties: Any compensation that involves fines or penalties, even if paid to employees, is not deductible. This includes penalties imposed due to employee actions that result in legal or regulatory violations.
- Payments for non-employee services: Payments made to independent contractors or non-employees for services are not deductible as employee compensation. Instead, these are reported as contractor expenses and subject to different tax treatments.
14. Depreciation deductions
Depreciation deductions allow small businesses to recover the cost of tangible assets, like vehicles, buildings, and equipment, over time. This deduction spreads the cost of the asset over several years, providing tax relief each year and aligning the expense with the period the asset is used in the business. Accelerated depreciation methods — when an asset is said to depreciate much faster in the first few years after purchase — can offer even greater immediate tax benefits.
However, not everything falls under that rule. For example, land, personal use assets, and extravagant items are not eligible for depreciation. You can find a detailed guide on how to depreciate properly on the IRS website.
15. Marketing and advertising deductions
Marketing and advertising costs are generally tax deductible as they are considered ordinary and necessary expenses for almost all small businesses. This includes expenses for creating and distributing ads, running promotional campaigns, and engaging in public relations activities.
However, the IRS draws a line in a few cases:
- Personal promotion: Costs related to personal promotion or advertising that primarily benefit an individual rather than the business are not deductible.
- Political contributions: Expenses for political advertising or contributions to political campaigns are not deductible. These costs are considered personal or charitable.
- Non-business related promotion: Costs for activities or events that are not directly related to the business's marketing efforts, such as sponsorship of unrelated community events, may not be deductible.
16. Financial and miscellaneous deductions
These deductions are less common but may still be significant for some businesses.
A good example of that is bad debt, which is when a creditor cannot pay back money owed to your business.. Any debt can be qualified as such after reasonable collection efforts have failed. In that case, the amount can be deducted from your business’s taxable income, reducing the overall tax liability.
Another interesting example is charitable donations for qualified charitable organizations (the organization needs to recognized by the IRS as tax-exempt under Section 501(c)(3)). In that case, proper documentation is required, including a written acknowledgment from the charity for donations over $250.
Some other examples include courses and different types of training, commercial bank fees, and interest paid.
17. Home office deduction
If you run a small business exclusively from your home (for example, you’re a sole proprietor or have an LLC), you can deduct a portion of your home office expenses.
You have two ways to calculate and use the deduction.
The simplified method allows you to deduct $5 per square foot of your home office up to 300 square feet. As a result, the maximum deduction using this method is $1,500.
The regular method is a bit more complex as it involves calculating actual expenses related to your home office, such as mortgage interest, insurance, utilities, repairs, and depreciation. The deductible amount is calculated by dividing the total expenses by the percentage of your home used exclusively for business.
18. Interest and bank fees
Interest paid on business loans is generally tax deductible as long as it’s motivated by a particular business purpose. This purpose may include financing business activities such as purchasing equipment, expanding operations, or covering working capital.
19. State and local taxes
As a small business owner, you may stumble upon taxes that you haven’t even heard before. However, they’re usually considered necessary for running your business, so they at the very least will help you reduce tax liability with the IRS.
The most common examples include:
Keep in mind that many of these categories are capped at certain amounts. Businesses can choose between deducting the state and local taxes or the state sales taxes, but cannot deduct both.
Key takeaways
Paying taxes as a small business owner can feel daunting, but thankfully there are plenty of tax breaks to be had. While the rules vary, if an expense is considered “ordinary and necessary” for your industry, it’s worth bringing up with your accountant.
Arguably, the most challenging part of deducting business expenses is the recordkeeping. You’ll likely spend more time than you like sifting through spreadsheets and email attachments because to claim a deduction, you’ll need receipts, invoices, order forms, and, if your business involves driving, mileage logs.
Using a mileage tracking app, like MileIQ, can help you claim every mile you drive for your business easier and faster. Drivers don’t need to update a log, miles get tracked automatically, and you can get automated reports and approve drives with a click.
