The Definitive Guide to Commonly Missed Small Business Tax Write-offs
Keeping track of small business tax deductions throughout the year is crucial to reducing the amount of taxes you owe come April. But, with so many possible write-offs, how are small business owners supposed to keep all of the tax deductions straight?
What are small business tax deductions?
Small business tax deductions are expenses related to your business that can be written off on your taxes. These tax deductions lower your taxable income which lowers the amount of tax you owe to the government when filing your taxes.
Being clear on what does and does not count as a write-off for your small business will help to better prepare you for when taxes are due. (Also, check out our tax calendar for 2023—so you can know just when your 2022 tax return is due!)
What are the most commonly missed small business tax deductions?
Check out some 18 of the most commonly missed tax write-offs and misunderstood small business tax deductions, and start tagging your receipts on Shoeboxed today!
1. ATM fees
Don’t you hate it when you’re stuck in an airport or hotel, and you need cash, like, now? Even if your only choice is a competitor’s bank, don’t sweat those ATM fees!
ATM fees are considered banking fees, and for small business owners, banking fees are part of what the IRS considers regular operating business expenses, as long as they’re ordinary and necessary for your line of work and the fees are from a business bank account.
Separating business and personal accounts will simplify tracking fees
Make your life—and the life of your accountant—infinitely easier by having separate bank accounts for business and personal transactions. That way, you’ll be able to easily track ATM fees for your business account each month.
Keep in mind that regular people (non-business owners) are not allowed to deduct ATM or bank fees as business expenses, so take care to only claim those business expenses associated with your business accounts.
So the next time you see a Wells Fargo machine when you bank with Chase, relax! Uncle Sam is ready to foot the bill for that $3 (or $5, or $7!?) fee.
2. Travel expenses
Mileage, parking, and tolls
This category is completely separate from the travel deductions you claim while away on business. If you’re staying somewhere overnight or are out of your local area, be sure to tag those receipts in a way that differentiates them from your regular business mileage.
Calculating the deduction for business mileage
There are two ways to calculate the tax deduction for the use of your car. First, you can take a standard mileage tax deduction that’s set by the IRS each year. After tracking your qualified business miles*, you’ll multiply the total number of miles by an amount determined by the IRS.
Standard vs actual expenses
As a small business owner, you can also claim the actual expenses of driving your vehicle. This is the total cost of owning and operating your vehicle each year.
This number is calculated by adding up all of your vehicle expenses such as mileage, the cost of repairs, vehicle depreciation, gas, car insurance, and registration fees, and then determining the percentage of time you used your car for business vs. personal travel.
Check out our guide to determine which option will get you the biggest tax deduction.
What are qualified business miles?
So what counts as qualified business miles? Believe it or not, driving to and from the office each day does not count as a tax deduction. Driving to an off-site meeting or temporary workplace does.
It’s important to claim a regular place of business so the IRS can easily see why certain trips away from the office qualify as business miles.
Fortunately, all cab fares, public transit costs, tolls, and parking fees that are related to your business are 100% tax deductible.
Again, make sure to separate the cost of parking while attending an in-town conference from the cost of parking your rental car while traveling in another state.
Meal deductions are some of the most commonly misunderstood write-offs for small businesses. That’s because the IRS has quite a few stipulations that need to be met before they’ll pay for your dinner!
In order to write off the cost of a meal as one of your business expenses, keep a few things in mind:
- The meal must be business-related to be considered a business expense. If you take your grandma out to eat during your lunch hour, it doesn’t count. Business-related means that business is being conducted or that the business meals will likely result in some sort of business transaction (i.e. someone is going to make money).
- Make sure not to double dip and claim business meals in two different categories—it’s either a meal write-off or a business travel write-off, but not both! If you’re dining while away on business, you’ll most likely want to claim the business meal as a travel expense.
- As part of the Consolidated Appropriations Act, the deductibility of meals has recently changed from 50% to 100%. Businesses can generally deduct the full cost of food and beverages that are business-related from a restaurant.
4. Phone and internet expenses while traveling
Isn’t it annoying how some airports still don’t offer free WiFi? What is this, 2002? Lucky for you, the cost of that overpriced 24-hour pass or a subscription to Boingo Wireless is a tax deduction as long as you’re using your surf time for business purposes.
Just like at home, you can’t deduct 100% of the cost of Internet expenses if you’re also using it for personal use. If your time spent on Facebook is more about catching up with friends than promoting your page, just be sure to calculate percentages accurately and claim only business-related time.
5. Business insurance
Lower your tax bill by protecting your business. Premiums for business insurance are one of those business tax deductions that are often overlooked.
This small business tax deduction is also one of those expenses that is a 100% deductible expense. Business insurance, along with other business expenses, are claimed on Schedule C.
6. Health insurance premiums
Small business owners who are self employed individuals can deduct health insurance premiums for their dependents, spouse, and themselves. This means that you pay the premium for your health insurance and do not participate in a plan provided by your spouse’s employer.
7. Mortgage interest
Mortgage interest is a deductible home business expense. If you use your home for business purposes, you can deduct mortgage interest payments paid toward mortgage loans. This includes loans to improve, construct, or buy your home.
8. Legal and professional fees
Legal fees and professional fees are deductible business expenses. If you hire an accounting or legal professional, 100% of their fees can be deducted on your tax return. These services must be directly related and necessary to running your business.
9. Home office expenses
With the home office deduction, small business owners and freelancers can use one of two methods for calculating home office expenses: the regular method or the simplified method.
The simplified method entails deducting $5 per square foot up to 300 square feet of your home that is used as business property. The regular method takes into account the percentage of your residence used as business property.
10. Office supplies
Office supplies are a deductible business expense not to be overlooked. This includes office supplies such as pens, staples, and paper. These may be small items for small businesses, but they can add up to a costly expense.
11. Independent contractors
If you hire freelancers or independent contractors as part of your work force, then the cost of hiring them is a 100% deductible business expense. This includes hiring them for any business-related purpose.
12. Other taxes
If business-related, there are some taxes that you can deduct on your tax return. These include taxes such as local and state real estate taxes, personal property taxes, sales taxes, and income taxes. Up to $10,000 in these taxes can be written off.
13. Educational expenses
If you take advantage of any educational opportunities designed to improve your current work-related skills, then this is a deductible business expense. Educational expenses include things such as supplies, books, tuition, and lab fees.
14. Qualified business income
In most cases, small business owners can deduct 20% of their business income on their taxes. This is the result of the 2018 tax reform that changed tax deductions for small business owners. This applies to pass-through businesses which pay their business tax as individual taxpayers versus paying it through their corporation.
15. Stamps and mailing costs
Snail mail is more than just kitschy-cool; it’s also one of those tax deductions for your small business! As long as what you’re mailing or shipping is business-related, you can deduct the cost of postage, envelopes, P.O. Box rental fees and delivery services like FedEx and UPS.
The IRS will even let you deduct the cost of a messenger service as long as something like that is regular and necessary for your business. (Read: sending a courier message to ask your best friend to lunch probably won’t count.)
Another most commonly-missed of the tax deductions is the cost of shipping. If your business sells physical goods and you pay the cost of shipping, those fees are tax deductible.
This is a great way for small businesses to entice new business (free shipping!) without actually incurring additional costs.
16. Shipping costs
Certain shipping costs are tax deductible as either miscellaneous expenses, freight shipping, or as expenses that are regular and necessary for your business.
Freight shipping is the transportation of large amounts of goods by aircraft, ship, train, or truck. It can be transported domestically and internationally by air, sea, or land.
If a product is being shipped in from the manufacturer to the business owner, Amazon, or a prep center, then it is considered ‘Freight in’ and falls under the calculation of inventory and COGS.
Cost of sales
When you pay for shipping out to a customer, it’s a business expense and falls under the Cost of Sales section. Freight shipping of products is deductible under the Cost of products or raw materials category. (See “Publication 535, Cost of Goods Sold,” pg.3, Internal Revenue Service.)
17. Moving machinery and machine parts
For instance, If you move machinery or machine parts from one city to another, you can usually deduct the cost from your taxes under the Moving machinery category. This decreases the amount of money you owe in taxes by the cost of installing the machinery in the new area. (See “Publication 535, Business Expenses,” pg.48, Internal Revenue Service.)
18. Storage unit operating expenses
For instance, expenses spent on storing documents and assets for future use to avoid loss and damages are tax deductions under the Storage category. (See “Publication 535, Cost of Goods Sold,” pg.3, Internal Revenue Service.)
Frequently asked questions
ARE STAMPS AND POSTAGE FEES TAX DEDUCTIBLE?
The IRS will give you a tax deduction for the cost of postage stamps as long as it is regular and necessary for your business. For example, if your business sells physical goods and you pay the cost of shipping, those fees are tax deductions.
In this way, providing free shipping can serve to entice new business without incurring additional costs. (See “Publication 535, What Can I Deduct?,” pg.3, Internal Revenue Service.)
ARE ATM FEES TAX DEDUCTIBLE?
As a small business owner, your ATM fees are tax deductible on your tax return. Because ATM fees are considered banking fees, and for small business owners, they are part of what the IRS considers regular operating expenses.
But, regular people (non small business owners) cannot deduct ATM or bank-related fees. So only claim banking fees on your tax return as tax deductible for bank charges associated with your business accounts.
ARE BANK FEES TAX DEDUCTIBLE?
Small business owners can write off your fees as a business expense if your fees satisfy two of the following criteria. (1) They are classified as a “business expense,” which ought to be “ordinary and necessary.” Also, (2) your transactions must occur in a business bank account.
ARE PO BOXES TAX DEDUCTIBLE?
If you’re sending business-related mail or packages, you can deduct the cost of postage, envelopes, and P.O. box rentals from your taxes as such expenses are considered essential and standard for business purposes.
Similarly, renting storage space for business-related storage and using shipping services like FedEx and UPS to get them delivered are eligible for tax deductions. (See “Publication 535, What Can I Deduct?,” pg.3, Internal Revenue Service.)
WHERE DO I PUT FREIGHT SHIPPING ON SCHEDULE C?
The IRS Tax Guide for Small Businesses states that if you use Schedule C to file your taxes, you can deduct shipping expenses from your total. You need to fill in line 27a of your Schedule C of your tax return.
Other costs, such as containers or packaging, can be deducted as shipping costs or selling expenses if they are not an integral part of the manufacturing product. The cost of goods sold includes the cost of shipping and receiving the materials needed to make products to sell.
WHAT’S THE STANDARD MILEAGE RATE FOR 2022?
For the final 6 months of 2022, the IRS announced that the standard mileage rate has been increased to 62.5 cents for every business mile driven. (By the way, did you know the Shoeboxed app can help you track your miles?)
As a small business owner, don’t miss out on the many possible tax deductions available to you! Stay informed by visiting IRS.gov for up-to-date tax information. And visit the Shoeboxed blog for how to scan, organize, and manage your tax receipts for the upcoming tax season! Still unsure about how to tag your receipt? Contact our Help Desk with questions.
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