1. Start-up costs
Did you start your new small business or side hustle recently? If so, you may be eligible to deduct certain expenses on your tax return. Start-up costs are expenses incurred before your business opens. For example, if you incurred expenses related to hiring and training employees before opening, advertising your new venture to prospective customers, consulting fees, or similar costs, you may be able to deduct up to $5,000 from your gross income. You may also be able to deduct up to $5,000 in expenses related to getting your business entity formed, such as the cost of establishing a corporation or Limited Liability Company (LLC). You can keep track of these expenses and more using a Small Business Tax Worksheet.
2. Professional service fees
Fees paid to attorneys, tax professionals, accountants, and consultants (such as legal or business advice) are typically deductible business expenses, as long as the underlying reason you incurred the expense was related to your self-employment.
3. Retirement plans
Self-employed people can take advantage of retirement plan tax breaks similar to those offered to employees. One option is to establish a Solo 401(k), designed for self-employed persons who do not have employees. If you have employees, you might consider establishing a SIMPLE IRA or a SEP IRA.
Review the latest IRS contribution limits (available at IRS.gov) to determine how much you can contribute and deduct. Your IRA contributions may also be deductible.
4. Business meals
Self-employed persons and small business owners can generally deduct 50% of business-related meals (food and beverages) purchased at restaurants when there was a legitimate business purpose for the meal. Check IRS Publication 463 for current rules.
5. Advertising and marketing costs
Advertising your business can be expensive. Fortunately, you may be able to deduct the advertising and marketing dollars you spent on trying to attract and retain customers as long as the expenses are ordinary and necessary. Some limitations apply, however, most regular marketing expenses are deductible.
6. Business loan and credit card interest
If you are paying off a business loan or have a credit card you use exclusively for business purchases, you can deduct the interest expenses paid on the loan or credit card purchases.
7. Office supplies
Most self-employed individuals and small business owners purchase office supplies from time-to-time. If you purchase things like paper, envelopes, postage, pens, and ink, be sure to keep your receipts, as these items are generally tax-deductible expenses.
8. Home office expenses
Do you have a separate home office or use a dedicated space in your home to work on your business? If so, deducting qualified home office expenses could help lower your tax bill. You may be able to deduct a portion of your mortgage payment or rent, property taxes, utilities, maintenance costs, and more.
There are two options for claiming this deduction. The simplified version provides a fixed deduction per square foot of your home used regularly and exclusively for business purposes, up to a maximum allowed by the IRS. The other option requires you to determine what percentage of your overall home’s square footage is used exclusively and regularly for your business. For example, if you use 7 percent of your home for your business, then you may be able to deduct 7 percent of the expenses identified above. This option requires greater record-keeping but may provide a higher deduction.
9. Office rent
If you lease office space, warehouse space, or maintain off-site storage for your small business, you can generally deduct the full amount of reasonable rent paid to someone else as a business expense.
10. Business phone and internet
If you have a cell phone that you use exclusively for business purposes, you can deduct the full amount of your phone bill. Similarly, if you pay for internet connectivity for your office, you can deduct your internet expenses. If your phone or internet usage covers both personal and business purposes, you may still be able to deduct a percentage of your bills for work-related use.
11. Vehicle expenses
Many self-employed people use their own personal vehicles for business. For example, they might drive to meet with clients or vendors or use their vehicle to make deliveries.
Similar to the home office deduction, you have two options for deducting car expenses on your taxes. First, you could take the simplified method, which involves tracking your business mileage and then claiming the IRS standard mileage rate.
The other option is to use the actual expense method. This method offers a deduction based on your actual vehicle expenses, including maintenance, gas, oil, tolls, insurance, lease payments, registration fees, garage fees, depreciation, and more. If your vehicle is used exclusively for business, it is easier to determine your deductible expenses than if it’s used for both personal and business travel.
With either approach, keep detailed documentation to support your calculation. You should record the date of business travel, the distance traveled, and the business purpose. In the event your taxes are audited, you may be required to provide these records.
12. Business travel expenses
If you travel for your small business, you may be able to deduct legitimate business travel expenses, including airfare, hotels, food, and ground transportation. Keep all receipts and documentation showing the business purpose for your travel to support your tax records in the event of an audit.
13. Business insurance
You may have various business insurance policies in place to protect yourself financially. Business insurance premiums, including things like errors and omissions (E&O) coverage, employee health policies, worker’s compensation, coverage for leased office space, liability insurance, and business auto insurance, may be deductible on Schedule C (Form 1040).
14. Health insurance premiums
If you purchased medical or dental insurance for yourself (and your spouse and dependents under age 27, if applicable) because you are self-employed and do not have access to employer-sponsored plans, you may be able to deduct the amount you paid in premiums during the year. You may also be able to deduct long-term care insurance premiums.
15. Memberships and subscriptions
If you pay membership fees to a professional organization related to your business—such as a trade association, chamber of commerce, business league, or professional group—you can likely deduct the amount paid in dues. However, you cannot deduct membership costs for country clubs or similar organizations where the purpose is entertainment or recreation.
You can also generally deduct the cost of subscriptions to industry or trade-related publications, and even your Rocket Legal+ membership.
16. Continuing education
Certain expenses paid to further your education or improve your skills related to your current business may be deductible on your federal tax return. Qualified expenses typically include tuition, fees, books, supplies, transportation to and from your classes, and related costs. Note that this deduction is limited to expenses related to your present work.
While taking classes to learn a new skill or to qualify for a different type of work may help you financially in the future, you cannot deduct those educational expenses as a business expense on your tax return.
17. Depreciation for large business purchases
If you purchased items for your business that are expected to last more than one year, you can depreciate their cost over a period of years (based on an IRS determination of the item’s useful life). This may include things like business vehicles, computer equipment, and commercial real estate. You may also be able to depreciate certain large business purchases more quickly by claiming bonus depreciation or Section 179.
18. Self-employment taxes
Self-employment taxes, which represent both the employer’s share and the employee’s portion of Medicare and Social Security taxes, can be a significant expense for many self-employed people. The good news is that you can deduct one-half of the amount paid when you file your income tax return.
19. Qualified business income (QBI)
The qualified business income (QBI) deduction offers substantial tax savings for some self-employed taxpayers. If you have pass-through business income from a sole proprietorship, LLC, partnership, or S-corp, you may qualify to deduct up to 20% of your qualified business income. Income thresholds for this deduction are updated annually; check the latest limits and eligibility criteria on the IRS QBI deduction page.
Small business taxes can be complex. If you have questions about a particular deduction or tax credit, or other questions about your self-employment, reach out to a Legal Pro for affordable legal advice.
Please note: This page offers general legal information, not but not legal advice tailored for your specific legal situation. Rocket Lawyer Incorporated isn't a law firm or a substitute for one. For further information on this topic, you can Ask a Legal Pro.
