Top Tax Deductions for Small Businesses, Startups and Entrepreneurs in 2024
As a small business owner or entrepreneur, maximizing your tax deductions is crucial for reducing your tax liability and keeping more money in your pocket. With the ever-changing tax landscape, it's essential to stay informed about the latest deductions and credits available to your business. In this comprehensive guide, we'll explore the top tax deductions that can benefit small businesses, startups, and entrepreneurs in 2024.
1. Startup Costs
If you recently launched a new business, you may be eligible to deduct up to $5,000 in startup costs incurred before the business became operational. These costs can include market research, advertising, employee training, and professional fees related to setting up the business. 126
However, it's important to note that this deduction begins to phase out once your startup costs exceed $50,000. If your startup expenses were $55,000 or more, you would not be eligible for the deduction. Any remaining startup costs that cannot be deducted in the first year can be amortized over a period of 180 months (15 years). 6
2. Home Office Deduction
If you use a portion of your home exclusively for business purposes, you may be able to deduct a percentage of your rent, utilities, insurance, and other home-related expenses as a home office deduction. 145
To qualify, the space must be used regularly and exclusively for business activities. The deduction is calculated based on the square footage of the home office divided by the total square footage of your home. For example, if your home office occupies 20% of your home's total area, you can deduct 20% of eligible home expenses. 4
3. Business Meals and Entertainment
Small business owners can deduct 50% of the cost of business meals and entertainment expenses in 2024. This includes meals with clients, employees, or potential business partners, as long as the expenses are reasonable and directly related to your business operations. 157
It's important to keep detailed records, including the date, location, purpose, and attendees for each meal or entertainment expense. Additionally, the deduction for entertainment expenses is subject to certain limitations, so it's advisable to consult with a tax professional. 5
4. Vehicle Expenses
If you use a vehicle for business purposes, you can deduct a portion of the associated costs, such as fuel, maintenance, insurance, and depreciation. There are two methods for calculating this deduction: the standard mileage rate or the actual expense method. 145
The standard mileage rate for 2024 is 65.5 cents per mile for business use. Alternatively, you can deduct the actual expenses incurred, including gas, oil, repairs, insurance, registration fees, and depreciation. Whichever method you choose, be sure to maintain detailed records of your business mileage and expenses. 4
5. Advertising and Marketing Costs
Small businesses can deduct the costs associated with advertising and marketing their products or services. This includes expenses for website development and maintenance, social media advertising, print or digital advertising, and promotional materials. 145
Additionally, costs related to attending trade shows, conferences, or networking events directly related to your business can also be deducted as marketing expenses. Be sure to keep receipts and documentation for all advertising and marketing expenses. 4
6. Employee Salaries and Benefits
As a small business owner, you can deduct the salaries, wages, bonuses, and other compensation paid to your employees, as well as the costs of providing employee benefits such as health insurance, retirement plans, and paid time off. 124
It's important to ensure that the compensation and benefits provided are reasonable and necessary for your business operations. Additionally, you must comply with all applicable employment laws and regulations, including withholding and reporting requirements. 2
7. Professional Services and Fees
Small businesses can deduct the costs of professional services, such as legal fees, accounting fees, and consulting fees, as long as these services are directly related to the operation of your business. 145
This deduction can include fees paid to attorneys for contract review or legal advice, accountants for tax preparation or financial planning, and consultants for business strategy or marketing services. Be sure to maintain records of the services provided and the associated fees. 4
8. Office Supplies and Equipment
The costs of office supplies, such as paper, pens, printer ink, and other consumables, are deductible business expenses. Additionally, you can deduct the cost of office equipment, such as computers, printers, and furniture, either through depreciation or the Section 179 deduction. 145
The Section 179 deduction allows small businesses to deduct the full cost of qualifying equipment and property in the year of purchase, up to a certain limit. For 2024, the maximum Section 179 deduction is $1,160,000, with a phase-out threshold of $2,890,000. 3
9. Rent and Utilities
If you rent an office space or commercial property for your business, the rent payments and associated utilities (electricity, water, gas, etc.) are deductible business expenses. 145
Be sure to maintain records of your lease agreement and utility bills, as well as any improvements or repairs made to the rented property, which may also be deductible. 4
10. Education and Training
Small business owners can deduct the costs of education and training related to their business operations or industry. This includes tuition fees, course materials, and travel expenses for attending seminars, workshops, or conferences. 145
However, the education or training must be directly related to maintaining or improving your skills in your current business or trade. Expenses for education that qualifies you for a new trade or business are generally not deductible. 4
11. Retirement Plan Contributions
As a small business owner, you can deduct contributions made to qualified retirement plans, such as a 401(k), SIMPLE IRA, or SEP IRA, for yourself and your employees. 124
The deduction limits vary depending on the type of retirement plan and your income level. For example, in 2024, the maximum deductible contribution for a SEP IRA is the lesser of 25% of your net self-employment income or $66,000. 2
12. Business Insurance Premiums
Small businesses can deduct the premiums paid for various types of business insurance, such as general liability, property, and professional liability insurance. 145
Additionally, if you are self-employed, you may be able to deduct the cost of health insurance premiums for yourself, your spouse, and your dependents, subject to certain limitations. 4
13. Bad Debt Expenses
If you have outstanding invoices or accounts receivable that have become uncollectible, you may be able to deduct these bad debts as a business expense. 145
To claim the deduction, you must have previously included the unpaid amount in your taxable income and made reasonable efforts to collect the debt. Be sure to maintain documentation of the debt and your collection efforts. 4
14. Charitable Contributions
Small businesses can deduct charitable contributions made to qualified organizations, subject to certain limitations. For 2024, businesses can deduct up to 60% of their adjusted gross income for cash contributions. 145
Be sure to obtain a receipt or written acknowledgment from the charitable organization for any contributions over $250, and maintain records of all charitable donations. 4
15. Interest Expenses
If you have taken out a loan or line of credit for business purposes, the interest paid on that debt is generally deductible as a business expense. 145
This includes interest paid on mortgages, business credit cards, and other loans used to finance your business operations or purchase business assets. However, there may be limitations on the deductibility of interest expenses, so it's advisable to consult with a tax professional. 4
16. Depreciation and Amortization
Small businesses can deduct a portion of the cost of certain assets, such as equipment, vehicles, and intangible assets (e.g., patents, trademarks), through depreciation or amortization. 145
The amount of the deduction depends on the type of asset, its useful life, and the depreciation method used. For example, the Modified Accelerated Cost Recovery System (MACRS) allows for accelerated depreciation of certain assets over a specified recovery period. 4
17. Research and Development (R&D) Tax Credit
If your small business engages in qualified research and development activities, you may be eligible for the R&D tax credit. This credit can be claimed for expenses related to developing new or improved products, processes, or software. 10
The R&D tax credit can be a valuable incentive for small businesses, as it can help offset the costs associated with innovation and technological advancement. However, the eligibility requirements and documentation requirements can be complex, so it's advisable to consult with a tax professional. 10
18. Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from certain targeted groups, such as veterans, ex-felons, or recipients of government assistance programs. 10
The credit amount varies depending on the target group and the number of hours worked by the employee, but it can be a valuable incentive for small businesses to promote diversity and provide employment opportunities to underrepresented groups. 10
19. Energy-Efficient Property Tax Credits
Small businesses that invest in energy-efficient property, such as solar panels, fuel cells, or geothermal systems, may be eligible for various tax credits. These credits can help offset the upfront costs of implementing environmentally-friendly technologies and promoting sustainability. 10
The specific credits available and their eligibility requirements can vary, so it's important to consult with a tax professional to determine which credits your business may qualify for. 10
20. Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act of 2017, allows eligible small business owners to deduct up to 20% of their qualified business income from their taxable income. 3
This deduction is available to sole proprietors, partners in partnerships, and shareholders in S corporations. However, there are income limitations and restrictions based on the type of business activity, so it's important to consult with a tax professional to determine your eligibility and maximize your deduction. 3
By taking advantage of these tax deductions, small businesses, startups, and entrepreneurs can significantly reduce their tax liability and reinvest those savings back into their operations, fueling growth and success.
Remember, tax laws and regulations are constantly evolving, so it's crucial to stay informed and consult with a qualified tax professional to ensure you're maximizing your deductions and remaining compliant with all applicable rules and regulations.
Sources:
1 https://quickbooks.intuit.com/r/taxes/tax-breaks-for-small-businesses/
2 https://shaycpa.com/tax-deductions-for-startups/
3 https://www.nfib.com/advocacy/taxes/
4 https://mycpacoach.com/blog/small-business-tax-deductions/
5 https://www.freshbooks.com/hub/expenses/tax-deductions-small-business[6] https://www.wolterskluwer.com/en/expert-insights/startup-costs-and-organizational-expenses-are-deducted-over-180-months[7] https://www.forbes.com/advisor/taxes/2024-tax-changes/
8 https://tax.feedspot.com/small_business_tax_blogs/
9 https://www.insureon.com/blog/small-business-tax-deductions[10] https://www.digitalocean.com/resources/article/five-tax-credits-for-us-startups
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. It is important to note that federal tax laws under the Internal Revenue Code (IRC) of the United States are subject to change, therefore it is the responsibility of taxpayers to verify their taxation obligations.
