Taxes can be complicated, particularly for small business owners with more pressing demands on their time. Nevertheless, cutting costs and increasing revenue is crucial in any enterprise. The last thing anyone who invests their blood, sweat, and tears in building their own business wants to do is miss out on tax deductions that could potentially save them thousands. In this article, we explore nine valuable yet commonly overlooked tax deductions.
1. Student Loan Interest
Business owners who paid interest on their student loan(s) can deduct up to $2,500 from their taxable income.
Due to the COVID-19 pandemic, interest on most federal student loans has been on pause since March 13, 2020. You can still deduct interest paid before that date, however, as well as interest on loans that failed to qualify for relief, such as private student loans.
2. Medical Expenses
If you or your dependent stayed in the hospital or incurred other costly medical or dental expenses, you can deduct these costs, provided that these qualified, unreimbursed medical expenses amount to over 7.5 percent of your adjusted gross income for the tax year.
A full list of qualifying expenses is available on the IRS website, but examples include:
- Hospital and nursing care
- Payments to doctors, surgeons, chiropractors, dentists, psychologists, psychiatrists, and other medical practitioners
- Prescription drugs, including insulin
- Addiction programs
- Weight-loss programs for diagnosed diseases, including obesity (although health clubs and diet food costs are non-eligible)
- Prescription or reading eyeglasses, contact lenses, hearing aids, dentures, wheelchairs, crutches, and service animals
- Transport and admission costs incurred by attending medical conferences on diseases affecting the claimant, their spouse, or a dependent
3. Home Office
If you run your business from home, you can claim a portion of your rent or mortgage along with the cost of utilities, maintenance and repairs, and similar expenses. You must calculate the percentage of the floor space in your home “exclusively and regularly” used for the business, so if the business takes up 20 percent of the home’s square footage, you may be able to claim a corresponding amount of expenses.
Irrespective of whether you claim the home office deduction, you may claim the business portion of your Internet, phone, and fax expenses. Although the IRS website states that claimants cannot deduct the whole cost of their first telephone line even if they have a home office, taxpayers are entitled to deduct 100 percent of any additional costs incurred when running their business (for instance, long-distance telephone calls or the cost of installing a second phone line dedicated to the business).
4. Self-Employment Tax
Self-employment tax covers Social Security and Medicare taxes. It is applied to self-employed individuals, including independent contractors, small business owners, and freelancers. Self-employment tax is payable at 15.3 percent, including 2.9 percent for Medicare, with the remaining 12.4 percent going toward Social Security.
These costs are effectively split 50/50 between the employer and the employee, with each party paying 7.65 percent. Self-employed individuals must pay the full amount themselves, so the IRS effectively treats the “employer” portion as a business expense, enabling self-employed individuals to deduct it accordingly.
5. IRA Contributions
To incentivize US citizens to save for retirement, the US government offers attractive tax breaks. Taxpayers contributing toward a traditional IRA may be entitled to claim a deduction, although the amount they can deduct depends on their income and whether they and their spouse are covered by a workplace retirement plan.
6. Health Savings Account Contributions
As with IRA contributions, the government offers tax perks to encourage taxpayers to set money aside to cover their medical expenses. As of 2021, you can claim up to $3,600 in health savings account contribution deductions, with a $7,200 coverage limit for families. Individuals aged 55 and older are also entitled to pay an additional $1,000 into their health savings account.
7. Educator Expenses
Schoolteachers and other eligible educators are entitled to deduct classroom supplies of up to $250 per annum.
8. Charitable Donations
Just like sizeable pledges, smaller out-of-pocket donations can be deducted. It is important to keep track of these disbursements since, over time, they can add up.
The cost of buying stamps for fundraising correspondence or purchasing ingredients to prepare dishes for a local soup kitchen are all claimable, as are travel expenses incurred in the courses of fundraising—drivers can deduct up to 14 cents per mile, along with parking and toll costs.
Where a contribution to a single charity totals more than $250, the IRS requires documentation from the charity acknowledging the support.
9. State Sales Taxes
This deduction is particularly advantageous for those who reside in a state that does not levy its own income tax. Claimants can choose whether to deduct state and local sales taxes or state income taxes, opting for whichever saves them the most money. So, for taxpayers living in a state that does not impose an income tax, the prudent choice is a sales tax write-off.