2022 complete list of small-business tax deductions
When you’re the owner of a small business, tax season may be stressful. Which of your previous year’s costs, such as rent, inventory, payroll, or utilities, are tax-deductible ? Have there been any new deductions added? Have additional small business deductions become invalid as a result of tax rule changes?
It’s unrealistic to take time away from your business’s day-to-day operations to research every single tax tip. In this guide to small company tax deductions, we’ll explain which deductions are available, highlight significant changes from last year, and point out potential methods to reduce your tax payment this year.
What is a small-business tax deduction?
A small business tax deduction is an item that qualifies for an IRS deduction and may be deducted from your taxable income. These deductions can help you minimize the amount of money you pay in federal and state taxes. What is a legitimate business expense? To be deducted, company costs must be both usual and essential, according to the IRS.
Let’s assume you made $50,000 in taxable income last year, but you spent $10,000 on qualifying deductible costs. Your taxable income is effectively reduced to $40,000 at this point.
“A small-business tax deduction is an IRS-qualifying expense that you can subtract from your taxable income.”
How do business tax deductions work?
There are two methods to claim tax deductions when filing small-business taxes: take the standard deduction or itemize your deductions. While taking the standard deduction is faster, you may lose out on certain money-saving options. Itemizing your deductions takes time and demands meticulous record-keeping, but it’s the most effective strategy to maximize small company tax benefits.
The first step in itemizing your deductions is to make a list of everything you wish to claim. Gather all relevant records to support these deductions, including receipts, property tax documentation, and employee benefit records (if you have employees). These documents will help you complete a Schedule A form with your tax return. These documents will also be your first line of defense if you are audited by the IRS.
To itemize your deductions, start by making a list of everything you wish to claim. Gather all relevant paperwork to support these deductions, including receipts, property tax documentation, and employee benefits records (if you have employees). When completing a Schedule A form with your tax return, you’ll refer to these documents. These documents will also serve as your first line of defense if you are audited by the IRS.
What’s new in 2022?
Before we go into the full list of small company tax deductions, keep in mind that there have been three modifications to the list of costs you may deduct in 2021.
- Car usage for business. If you drove for business and kept account of your mileage, you should know that the deductible mileage rate for 2021 is 56 cents per mile, down from 57.5 cents per mile in 2020.
- There is a commercial interest. If you paid interest on a business loan, the amount of interest you can deduct has been reduced. You can deduct interest charges up to 50% of your taxable income for the 2020 tax year.
- You may no longer deduct the total net loss if your small business lost more money in 2021 than it made. Your business loss deduction is restricted to $524,000 if you’re married and filing jointly. Your business loss deduction is restricted to $262,000 if you’re single. The remaining loss must be treated as a net operating loss for the taxable year. Furthermore, according to a clarification contained in the CARES Act, any W-2 income earned outside of your business (including your spouse’s W-2 income) must be reported as taxable income, even if your firm loses money. It’s important to see a CPA or other tax specialist if you’re in this circumstance.
Complete list of small business tax deductions
Which tax breaks do you have access to as a small business owner? The following list details all of the various deductions you can claim when filing your taxes in 2021. Before mailing your return to the IRS, consult a CPA or other tax professional. (Your payment is tax-deductible.)
- Business meals
- Business insurance
- Business interest
- Advertising and marketing
- Business use of car
- Education
- Depreciation
- Legal fees
- Moving expenses
- Rent
- Salaries and benefits
- Phone and internet expenses
- Travel expenses
- Home office
- Office supplies/expenses
- Startup expenses
- Business bad debt
- Business casualty losses
- Charitable donations
- Investment interest
- Foreign earned income exclusion
- Retirement
- Contract Labor
- Employee and client gifts
Business meals
Business meals for employees, clients, and potential clients can be tax-deductible, depending on the purpose of the meal. Are you rewarding employees with a company party? That’s 100% deductible. Are you taking clients out for dinner and drinks but not discussing business? Unfortunately, not deductible.
- Percentage deductible:
- Company-wide party – 100% deductible
- Your own meals as part of doing business – 100% deductible
- Office snacks and meals – 50% deductible
- Business meals with clients – 50% deductible
- Entertaining clients – 0% deductible
- Eligibility:
- The expense must be reasonable and not extravagant or excessive.
- You or an employee must be present.
- The meals must be served to a current or potential business customer, consultant, client, or similar business contact.
- If the meal is provided at an entertainment activity, it must be purchased separately from the activity itself.
- Example deductions:
- Meal expenses while traveling on business
- (Reasonable) food and beverage expenses during social company activities, including holiday parties and happy hours
- Special considerations: To be eligible, meal costs must be considered reasonable. Exorbitant prices for extravagant meals likely won’t qualify as a deductible business expense.
Business insurance
If you have business insurance that is both usual and required for your company’s operations, you can deduct the entire cost of the insurance. Most contemporary firms are obliged to carry some sort of business insurance by state legislation, industry requirements, or contracts.
Deductible percentage: 100 %
Eligibility: The commercial insurance coverage must be beneficial to the company and serve a business purpose.
Following are some examples of deductions:
- Insurance for data breaches
- Insurance for general liability
- Insurance for workers’ compensation
- Insurance for commercial real estate
- Liability insurance for professionals
Particular considerations: Some company insurance premiums are not deductible. The IRS is unlikely to approve if the insurance policy in question is not considered usual and required.
Business interest
The interest you pay on a loan for business purposes (including a mortgage on commercial real estate) or a line of credit for company purchases is tax-deductible. However, there is a limit, and it has been altered for the 2021 tax year. The interest cost deduction has been reduced from 50 percent of taxable income to 30% of taxable income.
What exactly does that imply? Let’s say you get a loan for your small business and pay interest on it. You might deduct the interest for the 2020 tax year, but your maximum deduction would be equivalent to 50% of your taxable income. If your taxable income is $100,000 and you paid $60,000 in interest on your loan, you may be entitled to deduct $50,000 (50 percent of $100,000) in interest. In 2021, with the same income and interest, you may only claim a $30,000 deduction (30 percent of your taxable income).
Percentage deductible: 100% (up to an amount equal to 30% of your taxable income)
Eligibility:
- You are legally liable for the acquired debt.
- You and the lender have a true debtor-creditor relationship.
- You and the lender must intend for the debt to be repaid.
Example deductions:
- Investment interest expenses
- Interest on purchases made on credit for inventory stock
- Prepaid mortgage interest on loans for business property
- Interest on credit card debt
Special considerations: Interest that must be capitalized does not qualify as tax-deductible. This includes any interest added to a principal balance of a business loan or mortgage. Capitalized interest should be assessed and depreciated along with other costs. (This is when you should talk to a tax professional.)
Marketing and advertising
If you spend money on advertising or marketing to promote your small business, you can deduct those expenses completely. They qualify as long as the costs are usual, reasonable, and essential.
Deductible percentage: 100 %
Eligibility: Any marketing or advertising costs incurred in client acquisition or retention efforts.
Following are some examples of deductions:
- Production costs for tangible marketing products such as business cards and flyers
- The prices of advertising on television, radio, print, and the internet
- Marketing with influencers
Particular considerations: Even if they have some promotional value, costs that are regarded as essentially personal are not deductible.
Business use of car
You can deduct the expenditures of using your car for commercial reasons. The optional standard mileage rate for deducting the costs of running a business car will be 56 cents per mile beginning January 1, 2021.
Deductible percentage: 100 %
Eligibility: Cars and trucks used for commercial purposes are known as business vehicles. You’ll need detailed records if you wish to deduct automobile expenditures.
Following are some examples of deductions:
- Taxes and registration costs
- Costs of gas and oil
- Repairs and maintenance
- Licenses
- Insurance for automobiles
- Payments for rent or lease
- Fees for tolls and parking
Special considerations: If you use the car for both business and pleasure, the charges must be apportioned according to mileage. Vehicles utilized for hires, such as taxis and airport shuttle vans, and vehicles used as equipment, such as dump trucks, do not qualify.
Education
You can deduct the costs of providing eligible educational benefits to yourself or your workers. Continuing education and courses for professional licensing are examples of tax-deductible education costs.
Deductible percentage: 100 %
Eligibility: Deductible education expenses must give value to the company and strengthen the expertise and abilities of the workforce.
Following are some examples of deductions:
- Classes and seminars aimed at improving abilities in the field of business.
- Professional publication subscriptions
- Webinars and seminars relevant to the industry
Particular considerations: Educational costs that qualify you or your employee for a different trade cannot be deducted. Courses required to fulfill the job’s minimal education requirement do not count.
Depreciation
You may use depreciation to spread the expense of fixed and tangible assets across time. In other words, it enables small company owners to consider age, wear, and deterioration over the product’s usable lifetime.
Deductible percentage: 100% of the depreciation value
Eligibility:
- You must own the asset to be eligible.
- You must include the asset in your revenue-generating processes.
- The asset’s projected useful life expectancy must be more than one year.
Following are some examples of deductions:
- Computers
- Office equipment and furnishings
- Vehicles for business
Particular considerations: Bonus depreciation allows you to deduct a higher percentage of the cost of assets bought during the tax year. Bonus depreciation allows you to deduct up to 100% of the cost of an item as long as it is commercially qualified.
Legal fees
Legal expenses paid by your small business are tax-deductible. This includes legal expenditures for cases you didn’t win.
Deductible percentage: 100 percent
Eligibility: The costs must be regarded as normal and essential for the firm to operate.
Following are some examples of deductions:
- Fees for dealing with tax problems
- Whistleblower compensation fees
- Fees associated with charges of unfair discrimination
Particular considerations: Any legal or professional expenditures connected to personal matters, such as child custody, personal injury, or property disputes, are not deductible.
Moving expenses
Did you relocate your company in 2021? You may be eligible to claim a tax deduction for your relocation expenditures.
Deductible percentage: 100 %
Eligibility: The expenditures of shipping company equipment, supplies, and inventory are often tax-deductible.
Following are some examples of deductions:
- Inventory stock transportation
- Machine relocation
Particular considerations: Moving costs that aren’t directly tied to the business’s relocation are no longer deductible. Personal relocation expenditures are not tax-deductible, with few exceptions for military personnel.
Rent
Another deduction may be available if you rent office space, a warehouse, or another sort of commercial property.
Deductible percentage: 100 percent
Eligibility: It is required that the property be used for commercial purposes.
Following are some examples of deductions:
- Amount paid for a building’s rent
- Rent for a company parking garage was paid.
Particular considerations: Rent expenditures are not deductible if you have or will have equity in or title to the property in issue. You may be able to deduct a portion of the expense of a home office if you use it. For further details, see the home office deduction.
Salaries and benefits
If you’re a small-business owner with one or more employees, you can deduct the cost of the employees’ salaries, benefits, and vacation pay. This includes regular wages, commissions, and bonuses.
Percentage deductible: 100%
Eligibility:
- The employee must not be the sole proprietor, a partner, or an LLC member.
- The salaries and benefits must be considered reasonable, ordinary, and necessary.
- The salaries and benefits must have been paid in the year in which you are claiming the deduction.
Example deductions:
- Employee salaries
- Employee paid time off
- Employee commission and bonuses
Special considerations: Generally, the IRS does not challenge itemized salary and benefits deductions. There are, however, some cases when the IRS will deem a deduction unreasonable—for example, if the employee is an investor or a personal acquaintance.
Phone and internet expenses
Deductible percentage: 100 %
Eligibility: Phone and internet use must be critical to the functioning of your company.
Following are some examples of deductions:
- Internet access
- Service on the phone
- When traveling for work, you may buy internet access in the air.
Particular considerations: You can only deduct the portion of the expense that indicates business use if you use your work phone and internet for personal reasons.
Travel expenses
You can deduct your expenditures if you travel to visit a customer, attend a conference, or for any other business-related reason.
Deductible percentage: 100%
Eligibility: A journey must be routine, required, and to a place outside of your state to qualify as business travel.
Following are some examples of deductions:
- Ticket prices for flights, trains, and buses
- Tolls and parking costs
- Taxi, Uber, and Lyft fares
- Lodging costs
Particular considerations: If you don’t perform business for most of your trip, the IRS deems it a vacation, and your costs aren’t deductible. Save any documents that demonstrate your vacation was for business purposes.
Home office
A home office is necessary for many small company owners, particularly contractors and freelancers. You may be able to deduct the costs of setting up and running a home office if you utilize one.
Percentage deductible: This is determined by how much of your house is utilized for business. Divide the square footage of your workplace by the total square footage of your home to get this proportion.
Eligibility: Your office doesn’t have to be in a separate room, but it does need to be in an area that is purely for work and company activities.
Following are some examples of deductions:
- Dedicated phone lines in the office
- Paint and other materials for home remodeling
- A percentage of your utility bills
- A percentage of the cost of homeowner’s insurance
Particular considerations: The home office deduction comes in two flavors: simple and standard. The simpler method is certainly easier, but it may result in a lesser tax benefit. The usual approach involves a little more math and meticulous recording, but it may result in a greater tax deduction.
Office supplies/expenses:
Supplies required to manage and maintain a working office are entirely deductible.
Deductible percentage: 100 percent
Eligibility: For an office product to be tax-deductible, you must fulfill three major IRS rules:
- You are not allowed to keep track of when the goods are utilized.
- You are not permitted to take inventory of the materials.
- The ultimate income of your company should not be materially skewed as a result of these deductions.
Following are some examples of deductions:
- Ink cartridges and printers
- Cleaning and janitorial materials
- Computer software for work, including software subscriptions
- Fees for web hosting for your company’s website
- Kitchenware that gets thrown away
- Paper and pens
Special considerations: If you purchased a big number of office supplies on December 31, 2021, you won’t be able to deduct the cost this year because it’s doubtful you’ll utilize all of them in 2021.
Startup expenses
You can deduct up to $5,000 in starting costs if you started your small business in 2021.
Deductible amount: 100 percent (up to $5,000)
Eligibility: A start-up expenditure is deductible if it’s a cost you’d ordinarily deduct while operating an established firm, but it happened before your business started.
Following are some examples of deductions:
- Costs of marketing
- Costs of travel
- The expense of training
Special considerations: If you are purchasing physical assets for your firm that will be used for more than a year, their costs must be depreciated throughout their useful lives. (For further information, see the Depreciation section.)
Business bad debt
Business bad debt occurs when someone owes your company money and you are unable to collect it (as opposed to nonbusiness bad debt). When you offer a product or service to a customer with the expectation that they would pay you later (in other words, on credit), and it becomes evident that you will not be paid, you may incur a business bad debt.
Deductible percentage: 100 percent (for fully worthless debt)
Eligibility: To be deemed deductible, the debt in question must be substantially or completely worthless. The value is determined by the likelihood that the debt will be repaid.
Following are some examples of deductions:
- Clients, distributors, suppliers, and staff are all eligible for loans.
- Customers are given credit for sales.
- Guarantees on business loans
Business casualty losses:
If your firm is the victim of theft or bodily damage, you can claim this deduction.
Deductible percentage: 100 percent
Eligibility: You must be the property owner, and the loss must have occurred as a consequence of a sudden, unforeseeable incident.
Following are some examples of deductions:
- Fires, hurricanes, tornadoes, and storms are examples of natural catastrophes.
- Vandalism
- Restrictions on pandemics
- Burglary
- Unrest in the community
Particular considerations: Long-term losses include things like erosion, wood decay, and termite infestation. They aren’t considered commercial losses.
Charitable donations:
If you want to give back to your community by making charitable contributions, you may deduct the whole amount.
Deductible percentage: 100 percent
Eligibility: The contribution must benefit a qualifying charity in order to be eligible. Make a monetary gift
Following are some examples of deductions:
- Donations to a religious group such as a church, synagogue, or mosque
- Donations to a federal, state, or local civil defense group
- Donations to a United States-based war veterans’ group
Special considerations: If your company is a sole proprietorship, limited liability company, or partnership, you should deduct charitable contributions from your personal taxes. If your company is an S-corporation, charitable gifts should be included on your corporate tax return.
Investment interest:
Interest paid on money borrowed by your small business with the goal of investing it can be deducted.
Deductible percentage: 100 percent
Eligibility: Deductible investment interest only refers to interest paid on money borrowed to generate future investment income. Interest, dividends, annuities, and royalties are examples of assets that should rise in value over time.
Following are some examples of deductions:
- Losses in capital
- Dividends that are tax-free
Particular considerations: You can’t claim a deduction for investment interest that exceeds your investment income.
Foreign earned income exclusion:
If you’re a U.S. citizen who owns a small business in another nation, you may be able to deduct your overseas earnings from your U.S. business tax return under certain conditions. The overseas earned income exclusion, in essence, stops you from being taxed twice.
Deductible percentage: 100 percent
Eligibility: You are either a citizen or a resident alien in the United States.
The Bonafide Resident Test has determined that you have a qualifying presence in a foreign nation. You’ve paid international taxes on money obtained in another country.
Example of a deduction: Particular considerations: Money you get as a distribution of earnings and profits, rather than reasonable compensation, isn’t eligible.
Retirement
You are responsible for supporting your own retirement plan as a small-business owner. Your gifts are, fortunately, tax-deductible.
Deductible percentage: 100 percent
Eligibility: To be considered tax-qualified, retirement funds must adhere to IRS standards.
Following are some examples of deductions: Contributions to the tax-qualified retirement plans listed below:
- Roth IRA is a type of IRA that allows you
- Keogh plan Solo 401(k) Simple IRA (k)
Particular considerations: If you have employees, the retirement plan you choose must benefit all of them, not just you.
Contract labor
Perhaps you don’t have regular staff, but in 2021 you hired a freelancer or independent contractor to work for you. Even if you have regular staff, you may choose to recruit a freelancer or independent contractor. Their costs are deductible as a business expense.
Deductible percentage: 100 percent
Eligibility:
Your small business does not hire a freelancer or contractor. The services supplied by the freelancer or contractor were for the benefit of your company, not for you personally.
Following are some examples of deductions:
- Your small company taxes are reviewed by an impartial accountant for a fee.
- You pay a one-time cost to a web designer to optimize your company’s website.
- You hire a freelance editor to check your company’s monthly blog entries.
Special considerations: You must submit a Form 1099-NEC to a contractor if you pay them $600 or more throughout the tax year. They’ll need this when it comes time to file their taxes.
Employee and client gifts
You may deduct the price of these presents if you offer each employee a snow globe for the holidays or send a customer a fruit basket to thank them for their business. Make sure you preserve documents that indicate the gift’s business purpose and the amount you spent.
Deductible percentage: 100% up to $25 per person
Eligibility: You provide the presents as part of your business.
It should be a tangible present rather than entertainment.
Following are some examples of deductions:
- You deliver a baby gift box to an employee who just had a baby.
- You send a bottle of wine to a client.