How a Small Business Can Save Money with Tax Deductions

With so many small businesses in our region, many clients of our Cape Cod accounting firm are looking for deductions that will reduce their tax bill and maximize profits. Small businesses have numerous opportunities to save money through tax deductions, often by leveraging expenses that are directly related to their operations. Beyond the obvious deductions like office supplies or employee wages, there are many lesser-known, creative ways small businesses can reduce their taxable income. Here are some unique and effective ways small businesses can save money using tax deductions:

1. Home Office Deduction

If you run your business from home, you might be eligible for a home office deduction. This deduction allows you to claim a portion of your rent or mortgage, utilities, property taxes, insurance, and home maintenance costs as business expenses, as long as your home office is used exclusively and regularly for business purposes. Even a small space, like a corner of a room, can qualify.

· Tip: Use the simplified method for the home office deduction, which allows you to deduct $5 per square foot of your home office (up to 300 square feet).

2. Business Use of a Vehicle

If you use your vehicle for business purposes, you can deduct expenses related to its use. There are two methods to claim this deduction: standard mileage or actual expense.

· Standard Mileage Rate: For 2025, the IRS standard mileage rate is 65.5 cents per mile for business miles driven.

· Actual Expenses: This includes gas, repairs, insurance, and depreciation. If your vehicle is used for both personal and business purposes, you can only deduct the portion that’s related to business use.

· Tip: Keep a detailed log of your business-related miles and expenses to ensure you can back up your claims.

3. Qualified Business Income Deduction (QBI)

The QBI deduction allows eligible small business owners (sole proprietors, partnerships, LLCs, S-corporations) to deduct up to 20% of their qualified business income. This deduction is available for income earned from pass-through entities, where business profits "pass through" to your personal tax return.

· Tip: To maximize the QBI deduction, ensure your business qualifies, and consult with a tax professional to optimize your income structure and deductions.

4. Retirement Contributions for You and Your Employees

Contributing to a retirement plan is not only beneficial for your future but also offers significant tax savings. Small businesses can take advantage of several retirement plans to reduce their taxable income.

· SEP IRA: Small business owners can contribute up to 25% of their compensation or $66,000 (whichever is lower) to a SEP IRA.

· Solo 401(k): If you're a sole proprietor, a Solo 401(k) allows you to contribute both as an employee (up to $22,500) and as an employer (up to 25% of compensation), giving you a total contribution limit of up to $66,000 (plus catch-up contributions if you’re over 50).

· Simple IRA: This plan allows contributions of up to $15,500 annually ($19,000 for those 50 and older) and also offers tax breaks.

· Tip: Consider setting up retirement plans for your employees to qualify for business tax credits, especially for new businesses.

5. Tax Credits for Hiring Employees

There are several tax credits available to businesses that hire certain types of employees:

· Work Opportunity Tax Credit (WOTC): If you hire individuals from specific groups (e.g., veterans, long-term unemployed, individuals with disabilities), you may be eligible for the WOTC. This can provide up to $9,600 per employee in tax credits.

· Research and Development (R&D) Credit: If your business engages in innovation or developing new products, you may qualify for the R&D tax credit. Many businesses mistakenly think this only applies to high-tech firms, but it can apply to many industries, including manufacturing, food, and software.

· Tip: Research and stay informed about eligibility for these credits, and consider consulting a tax professional to identify any that might apply to your business.

6. Startup and Organizational Costs

If you’ve recently started your business, you can deduct up to $5,000 in startup costs and organizational costs for the first year of operation. These costs include things like:

· Legal and accounting fees

· Market research

· Advertising to promote your business

· Employee training

· Tip: Keep all invoices and receipts from your startup phase, and take advantage of these deductions early on to reduce taxable income.

7. Section 179 Deduction for Equipment and Property

Under Section 179 of the IRS tax code, businesses can deduct the full purchase price of qualifying equipment or software in the year it’s purchased rather than depreciating it over several years. This deduction is particularly valuable for small businesses that need to purchase expensive equipment or property.

· Tip: Consider making large purchases toward the end of the year to take advantage of the full deduction in that tax year.

8. Business Travel Expenses

Business owners who travel for work can deduct a variety of business travel expenses, including:

· Airfare, hotel stays, meals, and car rentals

· Travel-related costs for business meetings, client lunches, and conferences

· Tip: Ensure you keep detailed records of the purpose of the trip, including receipts and itineraries, to avoid audit issues.

9. Education and Training Costs

Any education, training, or certification directly related to your business is deductible. This includes:

· Online courses or workshops

· Seminars, webinars, and industry events

· Books and materials that help you improve your skills or knowledge

· Tip: If you or your employees are attending events that will improve job skills or business operations, these expenses are deductible.

10. Interest on Business Loans and Credit Cards

Interest payments on business loans or credit cards used for business purposes are deductible. This includes:

· Interest on business-related loans (e.g., equipment loans, business lines of credit, and mortgages for business property)

· Interest on business credit cards for expenses related to your business

· Tip: Keep personal and business finances separate to ensure you are only deducting interest related to the business.

11. Health Insurance Premiums

Small businesses can deduct health insurance premiums for themselves and their employees. If you're a sole proprietor, you can even deduct premiums for yourself, your spouse, and your dependents on your personal tax return.

· Tip: For self-employed individuals, these premiums are deducted above the line, meaning they reduce your adjusted gross income (AGI) directly.

12. Charitable Contributions

If your business makes charitable contributions to qualified nonprofits, those donations are tax-deductible. This applies whether you donate money or goods, and even if you support local community events or fundraisers.

· Tip: Keep detailed records of all donations, including receipts and letters from the nonprofit acknowledging the donation.

Final Thoughts

Maximizing tax deductions requires a combination of keeping excellent records, being aware of all available opportunities, and working with a tax professional who understands your business needs. Whether it's leveraging startup deductions, writing off business travel, or using Section 179 for equipment, there are numerous ways small businesses can reduce their tax burden. By taking advantage of these unique tax-saving strategies, you can save significant money and reinvest those savings into growing your business.

Please contact The Varney Group, a Cape Cod accounting firm with offices in Chatham, MA with any questions or to arrange a consultation.