Which Potential Business Deductions Get Often Overlooked?
Tax season can be a stressful time for businesses, especially when it comes to ensuring that all available deductions are accounted for. Business owners often focus on the more obvious deductions, like office supplies, rent, and salaries, but there are many potential deductions that are frequently overlooked. These overlooked deductions can add up to significant tax savings, so it’s important for businesses to be aware of them.
In this article, we’ll cover a variety of potential business deductions that many business owners either don’t know about or fail to take full advantage of. Understanding these deductions can help reduce your taxable income and improve your financial health.
1. Home Office Deduction
One of the most commonly overlooked deductions is the home office deduction. This deduction is available to individuals who use part of their home exclusively for business purposes. While many small business owners are aware of this, they often misunderstand the requirements or underestimate its value.
To qualify for the home office deduction, the space must be used regularly and exclusively for your business. It doesn’t have to be a separate room—it can be a portion of a room, as long as it’s dedicated solely to business activities. This deduction allows you to deduct a portion of your home-related expenses, such as rent or mortgage interest, utilities, property taxes, and maintenance costs.
You can choose between two methods of claiming this deduction:
- Simplified Option: Deduct $5 per square foot of your home office, up to a maximum of 300 square feet.
- Actual Expense Method: Calculate the actual expenses related to your home office based on the percentage of your home’s square footage that is used for business purposes.
Why It’s Often Overlooked
Many business owners are either unaware of the home office deduction or they assume it’s not worth claiming because they work from home irregularly. However, the IRS allows flexibility for business owners with both dedicated office space and workspaces that are used regularly for business.
How It Can Save You Money
The home office deduction can significantly reduce your taxable income by allowing you to deduct a portion of your home expenses, such as rent, mortgage interest, utilities, and even home repairs. By using the simplified method, you can avoid complex calculations and still receive tax savings. For those using the actual expense method, the savings can be even greater, especially if your home office occupies a large portion of your home. Even smaller home office spaces can provide a substantial reduction in your tax burden when added up over the course of the year.
2. Startup Costs
When starting a business, many owners overlook the fact that startup costs can be deductible. The IRS allows businesses to deduct up to $5,000 in startup costs in the year the business begins, and any remaining costs can be amortized over 15 years.
Startup costs include:
- Researching the market
- Advertising and promotional expenses before launch
- Travel and meeting costs for finding potential suppliers or distributors
- Fees paid to consultants, attorneys, and accountants during the setup phase
Why It’s Often Overlooked
Since many of these expenses occur before the business officially begins operations, they are easy to forget about when tax season rolls around. Business owners may also not realize that startup costs are deductible in the first place, especially if they are focused on other aspects of launching the business.
How It Can Save You Money
By deducting up to $5,000 of your initial startup costs in the first year, you can immediately reduce your taxable income during the crucial first year of operation, when cash flow may be tight. Amortizing the remaining startup costs over 15 years also provides ongoing tax savings, helping to soften the financial blow of launching your business. This deduction ensures that you’re not stuck waiting years to benefit from the money you’ve already spent getting your business off the ground.
3. Vehicle Expenses
Businesses that use a car or truck for work-related purposes can often deduct vehicle expenses. The IRS allows two methods for deducting vehicle expenses:
- Standard Mileage Rate: For 2023, the standard mileage rate is 65.5 cents per mile for business travel.
- Actual Expense Method: This method involves keeping track of all vehicle-related expenses such as fuel, maintenance, insurance, and depreciation, and then deducting the portion of these expenses related to business use.
Why It’s Often Overlooked
Many business owners use their personal vehicles for business purposes and fail to track their mileage or separate their personal use from business use. Additionally, they might not realize that commuting between job sites or visiting clients can count as deductible mileage.
How It Can Save You Money
Tracking your business mileage or actual vehicle expenses can lead to significant savings. If you frequently travel for business, the standard mileage deduction can quickly add up, especially if you log a large number of miles. If you choose the actual expense method, you may be able to deduct a portion of fuel, insurance, and maintenance costs, which can be substantial for businesses that rely heavily on transportation. By accurately documenting vehicle use, you can ensure you’re not leaving money on the table when it comes to vehicle-related deductions.
4. Meals and Entertainment
Business meals and, in some cases, entertainment can be deductible, but these deductions are often overlooked because the rules can be confusing. For meals, you can typically deduct 50% of the cost, provided that:
- The meal is related to your business
- You or an employee are present at the meal
- The meal isn’t lavish or extravagant
For 2021 and 2022, the IRS temporarily increased the deduction for business meals from restaurants to 100% as part of pandemic-related relief.
Why It’s Often Overlooked
Business owners may not realize that meals purchased for client meetings or meals during business travel are deductible. They may also be hesitant to claim this deduction due to confusion over what qualifies or fear of triggering an audit.
How It Can Save You Money
Although meals are generally only 50% deductible, this deduction can still add up, especially for businesses that frequently entertain clients or hold meetings over meals. Keeping track of business meals can help offset the cost of wining and dining clients, partners, or vendors. This deduction is particularly valuable for service-based industries where client relationships are key to business success. For 2021 and 2022, the 100% deductibility of restaurant meals provided even more savings during those specific years.
5. Continuing Education and Training
Many professionals are required to stay updated on industry trends, regulations, or certifications through continuing education and training. These expenses are deductible if they maintain or improve skills needed for the business. They include:
- Tuition for courses relevant to your field
- Costs of attending seminars or workshops
- Expenses for online training programs
Why It’s Often Overlooked
Some business owners may not be aware that educational expenses qualify as a deduction. They may also confuse these with personal educational expenses, which have different deduction rules, or fail to connect the expense directly to their business activities.
How It Can Save You Money
By deducting continuing education expenses, you can reduce the financial burden of staying current in your field. Courses, seminars, and certifications can be costly, but claiming these deductions can lessen the impact on your bottom line. Additionally, if these educational efforts lead to new business opportunities or increased expertise, you may see a double benefit of both tax savings and increased revenue over time.
6. Health Insurance Premiums
If you’re self-employed, you may be able to deduct the cost of your health insurance premiums. This includes premiums paid for yourself, your spouse, and your dependents. This deduction is available even if you don’t itemize your deductions, making it especially valuable.
Why It’s Often Overlooked
Many self-employed individuals may not realize that health insurance premiums are deductible separately from itemized deductions. Additionally, they might overlook this deduction because they think it only applies to larger businesses.
How It Can Save You Money
Deducting health insurance premiums can provide significant tax savings, especially if you’re self-employed and paying for coverage out of pocket. This deduction allows you to reduce your taxable income, making it particularly beneficial for those paying high premiums for family coverage. The ability to take this deduction without itemizing is a major advantage for many small business owners, ensuring that you’re not missing out on savings if you’re otherwise unable to itemize deductions.
7. Retirement Contributions
Small business owners can contribute to retirement accounts like a SEP IRA, SIMPLE IRA, or Solo 401(k). Contributions to these accounts are typically deductible, and they offer a way to reduce taxable income while saving for the future.
- SEP IRAs allow for contributions up to 25% of your compensation or $66,000 (for 2023), whichever is lower.
- Solo 401(k)s also have generous contribution limits, allowing both employee and employer contributions.
Why It’s Often Overlooked
Small business owners often forget to take advantage of retirement plan contributions because they are focused on the immediate cash flow needs of the business. They may also not realize how much they can contribute and deduct.
How It Can Save You Money
Contributing to retirement plans not only helps you save for the future but also reduces your taxable income in the present. For small business owners, retirement plan contributions can result in substantial deductions. With high contribution limits for SEP IRAs, SIMPLE IRAs, and Solo 401(k)s, you can reduce your taxable income by tens of thousands of dollars each year, all while building your retirement nest egg. This strategy is particularly effective for high-earning business owners looking to maximize tax deferral.
8. Professional Fees and Memberships
Many businesses rely on professional services and memberships to maintain their operations. Fees paid to attorneys, accountants, consultants, and other professionals are typically deductible. In addition, the cost of joining trade organizations or professional groups is also deductible if it’s relevant to your business.
Why It’s Often Overlooked
These expenses may seem minor or get lost among day-to-day operations, especially for small businesses that handle these services sporadically. Some businesses also don’t realize that these are deductible, especially when paying membership dues or consulting fees.
How It Can Save You Money
The costs of hiring accountants, lawyers, consultants, or paying membership fees to professional organizations can be significant, but they are also fully deductible. Claiming these deductions ensures that you aren’t penalized for seeking professional advice or staying connected with industry groups. For businesses that frequently rely on outside expertise, these deductions can add up to significant savings, helping you reduce the overall cost of doing business while also maintaining a network of professional support.
9. Insurance Premiums
In addition to health insurance, other types of insurance premiums are often deductible, including:
- General liability insurance
- Workers’ compensation insurance
- Property and casualty insurance
- Professional liability insurance (such as malpractice or errors and omissions insurance)
These deductions are available for both small and large businesses, regardless of whether they are operating as a sole proprietorship, LLC, corporation, or partnership.
Why It’s Often Overlooked
Business owners may overlook these deductions simply because they lump them into broader expense categories, like office or administrative costs, without recognizing the potential for a specific tax deduction.
How It Can Save You Money
Deducting insurance premiums, including those for general liability, property, and workers’ compensation, can lead to substantial savings. Many businesses require multiple types of insurance, and premiums can be a large ongoing expense. By deducting these costs, you can ensure that you’re not overpaying on your taxes, particularly if your business operates in industries where insurance is required by law or is necessary for risk management purposes.
10. Software and Subscriptions
Many businesses rely on software to manage operations, marketing, and finances. Software expenses—whether purchased outright or paid for via subscription—are deductible. This includes:
- Accounting software like QuickBooks or Xero
- Customer relationship management (CRM) software
- Marketing tools such as email platforms
- Cloud storage solutions
Why It’s Often Overlooked
Business owners might overlook these deductions because they view software as a long-term investment, especially when paying for licenses or subscriptions annually.
How It Can Save You Money
Deducting software and subscription costs can save you a lot of money over time, especially since many of these services have recurring charges. Whether it’s an annual subscription to accounting software or monthly fees for cloud storage, these costs can add up. By deducting these expenses, you effectively reduce the net cost of using these critical tools, ensuring that your investments in business software don’t eat into your profits.
11. Bad Debts
If your business sells goods or services on credit and a customer fails to pay, you may be able to deduct the bad debt. This is typically relevant for businesses that use the accrual method of accounting, which records income when a sale is made, not when payment is received.
The deduction is only allowed if the income from the sale was previously included in your taxable income.
Why It’s Often Overlooked
Many business owners using the accrual method might overlook this deduction because it requires careful tracking of bad debts and proper documentation that the debt is, in fact, uncollectible.
How It Can Save You Money
For businesses using the accrual method of accounting, deducting bad debts can help offset income that was previously reported but never received. This deduction allows businesses to correct their taxable income when a customer defaults on payment, preventing the business from being taxed on money it never actually received. Over time, this can lead to significant savings, especially for businesses with a large number of receivables or those operating in industries with high levels of unpaid invoices.
12. Charitable Contributions
Businesses can also deduct charitable donations made to qualifying organizations. C corporations can deduct charitable contributions up to 10% of their taxable income, while sole proprietorships, partnerships, and S corporations pass the deduction through to the owners or shareholders.
Why It’s Often Overlooked
Business owners may think charitable deductions only apply to personal tax returns, not realizing that businesses can also deduct contributions, or they may fail to properly document these contributions.
How It Can Save You Money
Making charitable contributions isn’t just a way to give back; it’s also a method for reducing taxable income. By deducting contributions made to qualifying organizations, businesses can lower their tax liability while supporting causes they care about. For C corporations, the ability to deduct up to 10% of taxable income can result in substantial savings, and for smaller businesses, passing deductions through to the owners or shareholders allows them to take advantage of personal tax savings as well.
13. Depreciation
Depreciation is a valuable but often misunderstood deduction that allows businesses to recover the cost of significant assets over time. When a business purchases an asset like machinery, vehicles, or office furniture, the IRS allows the cost of that asset to be deducted over its useful life, rather than entirely in the year it was purchased.
There are several methods of calculating depreciation, but the most common is the Modified Accelerated Cost Recovery System (MACRS). Under MACRS, assets are divided into categories based on their useful life, and the cost is deducted according to a specific schedule. Some assets, like computers or office furniture, are depreciated over 5 or 7 years, while real estate can be depreciated over 27.5 to 39 years.
Additionally, the IRS offers two key provisions to accelerate depreciation for certain assets:
- Section 179 Deduction: This allows businesses to immediately deduct the full cost of certain qualifying assets in the year they are purchased, up to a limit ($1,160,000 for 2023).
- Bonus Depreciation: Bonus depreciation allows businesses to deduct a significant percentage of the cost of qualifying assets upfront. For assets acquired between 2017 and 2022, the bonus depreciation rate was 100%, although this percentage is gradually being reduced through 2026.
Why It’s Often Overlooked
Many small business owners either don’t realize they can claim depreciation on certain assets or find the process too complex to navigate. Depreciation involves tracking the asset’s purchase price, useful life, and calculating annual deductions, which can feel burdensome. Additionally, some businesses fail to claim depreciation on assets purchased for small amounts, not realizing that these assets still qualify for depreciation.
How It Can Save You Money
By properly claiming depreciation, businesses can reduce their taxable income significantly over time. Depreciation spreads out the cost of large purchases, ensuring that businesses aren’t penalized by having to deduct the cost all at once, and can take advantage of tax savings over multiple years. It’s particularly valuable for businesses with significant equipment or property purchases, such as manufacturers or companies heavily reliant on physical assets.
Failing to track and claim depreciation can result in missed tax savings that add up over the lifespan of your business assets. Moreover, depreciation deductions are especially useful for offsetting profits, making them an essential part of tax planning.
14. Advertising and Marketing Costs
Advertising and marketing expenses are crucial for growing a business and attracting customers, but many business owners either fail to deduct them or underestimate the range of expenses that qualify. The IRS allows businesses to deduct most of the costs associated with advertising, promotion, and marketing. This includes:
- Traditional advertising, like TV, radio, and print ads
- Online advertising (social media ads, Google Ads, etc.)
- Website design and hosting fees
- Business cards, flyers, and promotional materials
- Sponsorships of local events or charity fundraisers (as long as there is a business benefit)
- Costs associated with maintaining a company website or blog
Why It’s Often Overlooked
Advertising and marketing expenses are often overlooked because business owners may not recognize that various promotional activities—especially those that don’t fit traditional forms of advertising—qualify for deductions. For instance, the costs of maintaining a company website or social media presence might not be considered a deductible expense by those unfamiliar with tax regulations. Moreover, smaller businesses and startups may handle marketing more informally and fail to track these costs properly. In some cases, business owners might think certain promotional efforts, such as charitable sponsorships or community events, do not count as business expenses when, in fact, they often do.
How It Can Save You Money
Advertising and marketing can be significant expenses, particularly for businesses trying to expand their customer base or establish a new product. By deducting these costs, you can lower your taxable income and offset the financial impact of running extensive marketing campaigns. This can be especially valuable for startups and growing businesses, where marketing budgets are a significant portion of the overall expenditure. Since advertising and marketing are essential for bringing in new business, deducting these costs helps ensure that you aren’t overpaying on your taxes as you invest in growing your brand.
Conclusion
Missing out on tax deductions can cost your business significant money, so it’s important to be aware of all the deductions that may apply to you. From the home office deduction to vehicle expenses, startup costs, and charitable contributions, there are a variety of overlooked deductions that can reduce your tax liability. By keeping detailed records and consulting with a tax professional, you can ensure that you’re taking full advantage of the deductions available to your business.
Tax laws can be complex, but with a bit of research and attention to detail, you can maximize your deductions and save money for your business. The deductions highlighted above are just a few examples of what you might be missing—each business has unique circumstances, so be sure to explore all potential deductions with your tax advisor.