Creative tax deductions for small businesses

Tax season can be stressful, especially for smaller businesses. Make sure you learn about all of the tax breaks you’re eligible for, like the qualified business income, home office, and startup cost deductions.

Many business owners aren’t aware of all the tax advantages available to them. This means you could be missing out on opportunities to lower your tax burden and, thus, continue to grow. 

Tax laws are complex, and deductions and credits frequently change. Keeping up with new tax breaks and regulations will help you stay on top of your tax game. Seeking professional advice can also ensure you’re effectively navigating any tax challenges that come your way.

You may be wondering, what expenses can I write off? This quick guide walks through a few creative tax deductions for small businesses that may help you reduce your tax bill.

Jump: to

• The qualified business income deduction – 199A
• How can I maximize my 199A deduction?
• Business expenses
• Using HoneyBook to improve your business’s systems

The qualified business income deduction – 199A

The qualified business income deduction was introduced in Provision 11011, Section 199A, of the Tax Cuts and Jobs Act. This deduction is significant—up to 20% of your qualified business income. Qualified business income is the net income, gains, deductions, and losses your business has for the year. 

To qualify for 2023, your total income must be below $182,100 for single filers, and for 2024, the limit increases to $191,950. You must also file as a sole proprietorship, partnership, S corporation, or limited-liability company. If your income is above the limit, your tax break is phased out, so many businesses don’t get that full 20%.

When you calculate your 199A deduction, remember that the deduction can be worth up to 20% of your taxable 199A income. You can claim this deduction even if you decide to take the standard deduction on your tax return.

How can I maximize my 199A deduction?

The key is to reduce your salary if you want to optimize qualified business income and achieve a bigger 199A deduction. You could:

• Avoid guaranteed payments to partners as they have no impact on qualified business income or the computation of salary limits.
• Accelerate deductions and increase retirement contributions.
• Invest in qualifying Real Estate Investment Trusts (REITs) as the specified service trade or business (SSTB) limitation and W-2 limitation do not apply to income from these investments.

Business expenses

So what does it mean to write off your costs? Many expenses required to run your business are tax-deductible. It’s easy to overlook some of these, especially when you’re new to business ownership. Let’s walk through some expense deductions you may not know about:

• Startup costs: In your first year of operation, you can deduct startup costs such as research, training, and legal costs. You can deduct up to $5,000 of these costs.
• Retirement contributions: You may be able to deduct the money you save for retirement as long as you follow the required annual limits. For 2024, the 401(k) limit is $23,000, with an extra $7,500 if you’re 50 or older, and the individual retirement account (IRA) limit is $7,000, or $8,000 if you’re 50 or older.
• Home office expenses: You can take a home office tax deduction if you work at home. You can calculate and claim this deduction if your office is your principal place of business and you regularly use it for business.
• Depreciation: If you purchase certain types of equipment for your business, you can write off the depreciation over time—a portion of the cost each annual tax period.
• Education costs: If you have education expenses related to the business, you could deduct them. Examples include relevant classes, training sessions, and professional subscriptions.

Understanding these creative tax deductions for small businesses will help you maximize your write-offs on your tax return. Always prioritize staying organized throughout the year with efficient record-keeping practices.

Using HoneyBook to improve your business’s systems

Staying aware of the small-business tax deductions you can claim for the 2023 tax year while keeping your tax information organized requires the right technology. Using a clientflow management platform like HoneyBook, you can keep everything in one place for easy tracking and reporting. You can manage your business information, projects, and payment systems to boost their workflow efficiency.