3 Ways to Reduce Your Tax Bill As a Small Business Owner

If you earn income that isn't reported on a W2 form by an employer, you probably qualify for certain small business deductions.

Tax deductions and tax credits can help you legally lower your tax bill. If you work for yourself, either full-time or part-time, you probably qualify for at least some of these tax deductions. Whether you own a business that has employees or you occasionally work a side hustle for extra cash, if your self-employed work is for-profit, legitimate business expenses are tax deductible.

1. Hire a qualified tax preparer

One of the most valuable partners you can have in business is a knowledgeable tax preparer. Experienced and qualified tax preparers likely know more than you do about legal deductions and credits you qualify for.

Your tax preparer doesn't have to be a Certified Public Accountant, tax lawyer, or enrolled agent, all of whom can be costly. Some tax preparers have more limited rights to prepare your return, but not to represent you in an IRS proceeding. Business owners on a budget can look for an Annual Filing Season Program Participant on the IRS website by searching in your area.

2. Seek out tax credits when you can

A tax credit is more valuable than a tax deduction. And the best kind of tax credit is refundable. Refundable tax credits can lower your tax bill to below zero (a refund).

One tax credit you should know about is the Retirement Savings Contributions Credit. If your adjusted gross income (AGI) is under $68,000 (married filing jointly), you can get a credit of up to $1,000 for contributing to a qualified retirement account. The income limit seems low, but remember, we are talking about your taxable income after all of your deductions are accounted for.

3. Document all of your business expenses

A business expense is any expense related to your business. In order for it to be a tax deductible business expense, it has to be ordinary and necessary. That means it has to be common for your industry and helpful for your business. If you are a freelance flamenco dancer, your costumes are a business expense. So are professional cleaning fees. If you're a freelance graphic artist, your clothing and shoes are not deductible, because you can wear your everyday street clothes to work. No one gets a tax deduction for buying everyday clothing.

Here are a few common business expenses to know about.

Automobile expenses

If you use your vehicle for work, even part of the time, some of your costs are tax deductible. If your vehicle is solely a work vehicle, you can deduct 100% of the cost to purchase and insure it, plus your costs for fuel, repairs, and maintenance. If your vehicle is both a personal and business vehicle, you can deduct expenses in the same proportion as its business use.

For example, if you drive your personal vehicle for a ride-sharing app for a few hours a week, you might determine that it's a work vehicle 20% of the time. That means you can deduct 20% of your auto expenses. Typically, the proportion is based on mileage, not hours or days. For that reason, it's a good idea to track all of your miles in a logbook that you keep in the car.

Home office or business location

The home office deduction is related to the percentage of your home that is dedicated exclusively to business activities (even if it's a portion of a room that has other uses).

If you have a home office, you can deduct a portion of your mortgage interest, property depreciation, utilities, repairs and maintenance, phone service, and internet service. If your home office is an 8 by 10 foot space in a 1,000 square foot home, then 8% of those expenses are legitimate deductions. If you have a dedicated phone line for your business, it is 100% deductible.

However, if you rent space for your business, the rent is deductible.

Office expenses, supplies, and equipment

Keep track of your office supply purchases. If they are for work, your printer paper, ink, pens, sticky notes, file folders, and other supplies are business expenses you can deduct. Likewise, your chair, file cabinet, and floor mat are, too. If you purchase paper goods for your office, those are deductible expenses as well. Your computer, printer, and other electronics hardware are business expenses if they are used more than half the time for work.

Software is deductible if it's for work, and so are certain subscriptions like Adobe products if you're an artist or newspaper subscriptions if you're a journalist.

Business interest

If you use a business credit card for business purchases and then are responsible for paying interest, that interest is tax deductible.

Similarly, fees for business financial products are deductible (like a business checking account monthly maintenance fee, a business credit card annual fee, or closing costs for a business loan).

Business meals and travel expenses

You can deduct your meals and travel expenses for work. In 2022, non-entertainment business meals are 100% deductible. You have to purchase the food from a restaurant that fits the IRS's definition (no convenience store food, for example).

When you're at home, if you dine out with a client, that meal is deductible. If you provide snacks and refreshments in your office, those expenses are 50% deductible.

Insurance premiums

If you buy insurance for your business, such as a general liability or professional liability policy, the premiums are 100% deductible.

Health, dental, and long-term care insurance premiums are tax deductible for self-employed people, as long as you're not eligible to participate in an employer-sponsored plan.

Life insurance for yourself is a personal expense and not deductible. But the premiums can be deductible under certain circumstances, such as when you provide life insurance for your employees, as long as you are not directly or indirectly the beneficiary.

Professional services

If you pay a professional to perform services for your business, that's a deductible business expense. Common examples include bookkeepers, accountants, lawyers or legal services, payroll service providers, web designers, graphic designers, and freelance writers.

Subcontractors and employees

If you subcontract or hire employees, the money you pay them is a deductible business expense. That includes any taxes or benefits you pay for them.

As a business owner, the goal is to get your AGI (adjusted gross income) as low as possible. Use deductions, credits, and year-round record-keeping to your advantage. Track everything, and let your tax preparer help you find legal business expenses that can help you minimize your tax bill.