10 Vital Small Business Tax Deductions To Use In 2024

Small business owners face significant pressure as the economy continues to recover from the pandemic, making many wary of the upcoming tax season. Whether you prepare your business taxes yourself or enlist the services of an accountant or CPA, it's crucial for all business owners to understand the tax deductions available to them.

Competitive businesses recognize that tax deductions are essential not just at the time of filing but also play a critical role in budget meetings, development plans, personal finances, and throughout the entire year.

So, let’s jump into 10 tax deductions that significantly impact your bottom line and your strategic planning for 2024.

#1 Home Office: How to Write Off Your Home Office

If you run your business from your home office, you can write off a portion of your rent/mortgage, utilities, electricity, homeowner’s insurance, and repair work! Here’s how to calculate your home office deduction:

• To qualify for the deduction, the office space must be entirely dedicated to work-related activities. If the deduction does not make a big impact, you can always try the simplified method too!
• Next, calculate the square footage of your dedicated home office compared to the rest of your home. Let’s say your office is 10% of your home’s total square footage.
• Now, you can write off 10% of your rent/mortgage, electricity and utilities, homeowner’s insurance, and relevant repair work from your taxable income.

Remember, home office deductions may use the honor system as you report your use of the home office and its size compared to your home– but be prepared to defend in a tax audit. Make sure that you can back up your math to avoid penalization.

#2 Business Insurance: How to Write Off Business Insurance

It’s best practice for nearly all businesses to have some form of business insurance, and coverage can be mandatory depending on your industry. However, many business owners avoid or delay getting coverage to keep a higher cash flow with a relatively low risk of needing insurance.

Premiums for business insurance like business liability insurance are deductible and encourage businesses to be adequately insured. So be sure to check that your insurance coverage is current, write off your premiums, and know that you have a financial contingency plan should you be involved in a lawsuit or accident.

#3 Auto Expenses: How to Write Off Auto Expenses

If you drive to client meetings, sales calls, or job sites, you must write off related auto expenses. Here is how to write off your car. The qualified auto expenses include:

• Mileage deductions (the standard rate for 2024 taxes is $0.67 per mile)
• Depreciation
• Annual registration fees
• Car insurance
• Maintenance

Mileage deductions are relatively straightforward. Track your mileage only for business-specific travel (no deductions for the trip dropping off your child at school on the way to a client meeting). Alternatively, you may choose to deduct the cost of gas for these trips instead of mileage.

Deducting general auto expenses like annual registration fees, car insurance, and maintenance follows a similar rule to the home office deduction. You’ll need to determine the percentage you used your car for business compared to personal travel– let’s use 40% for this example.

Suppose 40% of your car use was for business purposes. In that case, you're eligible to deduct 40% of your general car expenses, including insurance, maintenance, and registration fees. To ensure you're covered during an audit, maintain thorough records of these expenses through your bank and credit card statements rather than relying solely on keeping physical receipts.

#4 Contract Labor: How to Write Off Contract Labor

Many small to mid-sized companies incorporate contract labor into their businesses. Freelancers are often used in marketing and IT departments, consultants jump-start development, and contractors may be part of your supply chain or delivery systems.

All contract labor fees to independent contractors for your business are deductible. Again, carefully record invoices and payments to document the cost and relevance to your business. 

You’ll also be required to send a Form 1099-NEC to any contractors paid $600 or more during a tax year by January 31st following the tax year.

#5 Asset Depreciation: How to Write Off Asset Depreciation

Most ongoing equipment expenses aren’t deductible in a single year– the IRS typically requires you to deduct the value of your assets over time. However, some exceptions will allow you to write off the cost of machines and equipment within the same tax year as the purchase. 

For example, the de minimis safe harbor election allows you to deduct assets that cost less than $2.5k per item the same year they were purchased, simplifying the deduction process for smaller purchases. For assets exceeding the $2,500 threshold, they are considered capital assets and must be depreciated over their standard useful life according to IRS guidelines. However, provisions like Section 179 or Bonus Depreciation may allow for the depreciation of these assets within the same year, offering significant tax advantages for larger investments.

#6 Relevant Education: How to Write Off Education

A huge part of running a successful business is continued education. Any education expenses that directly or indirectly relate to your job skills are 100% deductible. However, courses unrelated to your current business or intended to prepare you for a different company you haven’t started yet do not qualify for deductions.

So, an SEO course is deductible if you run a website-building company, but a course in real estate.

#7 Legal and Professional Fees: How to Write Off Legal and Professional Fees

Every business has at least an occasional need for legal and financial support. All fees paid to lawyers, accountants, or bookkeepers are deductible if they support your business. 

Sometimes, your personal legal or financial fees overlap with your business. For example, you could set up a family trust and incorporate your business into that trust. The trust fees are not 100% deductible in this case– only the portion of the cost that dealt with the company is deductible.

#8 Employee Salaries and Benefits: How to Write Off Employee Salaries and Benefits

Of course, business owners need to deduct the salaries and benefits offered to their employees but be careful about the fine print. This deduction applies explicitly if all the following are true:

• The salary and benefits were reasonable and necessary, meaning the position is required for your business, and the amount was in line with industry standards.
• Additionally, don't consider trying to deduct personal expenses, such as your nanny's salary, as a business expense. These do not qualify.

#9 Software Costs: How to Write Off Software Costs

Essential software for your business operations, including both one-time purchases and subscriptions, is fully deductible. Ensure the software is vital for your business, and maintain clear records for any software used both personally and professionally to accurately deduct the business-use portion. Dedicated business software is entirely deductible.

#10 Qualified Travel Expenses: How to Write Off Travel Expenses

Travel deductions are often misunderstood and accidentally exploited. So, let’s clarify the IRS rules surrounding writing off business travel expenses:

• The travel must include work lasting longer than a regular work day and require sleep away from the city where the business is located.
• The travel must center around business-specific activities like finding new clients, meeting with current clients, or education specific to your industry.
• The expenses must be reasonable– luxury expenses are not deductible, but you don’t have to purchase the cheapest options either. Fully document and notate travel expenses to avoid problems during an audit.

If you meet these requirements, you can deduct coverage provided to your spouse and children under age 27 (even if they aren’t dependants on your tax return). Check  IRS Publication 535 to read these regulations thoroughly. 

Many business owners only review tax deductions in the first quarter while they go over their tax filings. But those wanting to get ahead and have the tax system work for them keep tax rules as a strategic part of their business at all times.

At AdaptCFO, we understand the power of preparedness. By ensuring your financial statements are clean and well-organized, we not only streamline your financial management but also help you reduce your CPA fees. Let us help you make your financial processes more efficient and cost-effective.