Tax Advice

12 Commonly Missed Tax Deductions for U.S. Business Owners

Tax season can be overwhelming for business owners. Amid the forms, deadlines, and regulations, there are many overlooked tax deductions that can significantly reduce your taxable income. Missing an expense here or there could cost you a few hundred dollars, but missing several tax deductions could cost you thousands of dollars each year.

Understanding which itemized deductions apply to your business and maintaining proper records of all expenses and out of pocket costs to help you deduct expenses is crucial. Otherwise you’ll end up paying more federal, state and local taxes than you should.

Why Do Business Owners Miss Tax Deductions?

Many business owners fail to claim eligible deductions due to lack of awareness or poor record-keeping. Here are some common reasons deductions get overlooked:

• Unfamiliarity with tax laws: Tax codes change frequently, and keeping up can be challenging without help from tax professionals.
• Small transactions slipping through the cracks: Monthly subscription fees or one-off purchases are often ignored because they seem insignificant, but they can add up over time.
• Blurred lines between personal and business expenses: Misclassifying expenses, such as internet or phone use, leads to missed claims.
• Inadequate documentation: Without proper records, it’s difficult to substantiate deductions during an audit.
• Avoiding tax preparation fees: The cost of tax preparation fees and expenses related to your accounting by tax professionals are deductible expenses.

So, let’s explore 12 of the most commonly missed itemize deductions, how they reduce your tax burden, and steps you can take to capture them. This guide will help you identify and maximize commonly missed tax credits and itemized deductions.

Tax Deduction #1: Education and Training

Investing in your professional development is not just a business benefit—it’s also a tax deduction. Whether you’re attending a webinar, enrolling in a workshop, or buying industry-specific books, these expenses qualify for a tax credit as business-related education.

This deduction is claimed on Schedule C (Form 1040) for self-employed individuals.

What’s Tax Deductible:

• Online courses, webinars, and seminars relevant to your field.
• Conferences and workshops designed to improve your skills or grow your business.
• Professional coaching or group memberships.

Common Mistake:

Failing to distinguish between professional development and personal education. For example, classes unrelated to your business or career training are not tax deductible.

How to avoid missing this deduction:

• Save course descriptions, receipts, and proof of payment.
• Keep a log of how each educational expense directly benefits your business.

Tax Deduction #2: Software and Subscriptions

In today’s digital age, business owners rely heavily on tools and software to streamline operations. But every tax year, these small, recurring expenses are among the most common tax deductions missed.

These deductions are reported on Schedule C (Form 1040) under ‘Other expenses.’

What’s Tax Deductible:

• Accounting tools like FreshBooks.
• Productivity software like Microsoft Office, Slack, or Trello.
• Cloud storage subscriptions such as Google Drive or Dropbox
• Social media management tools like Hootsuite or Later.
• Industry-specific platforms or apps.

Common Mistakes:

Using personal payment methods for business-related software and forgetting to record these transactions.

How to Avoid Missing This Deduction:

• Use a business credit or debit card for all software purchases.
• Review your app store purchases periodically for overlooked expenses.

Tax Deduction #3: Internet and Cell Phone Expenses

For business owners who operate from home or use personal devices for work, it’s easy to miss out on a standard deduction for internet and phone services. Sure, you can’t claim personal usage, but the portion you use for business is deductible.

What’s Tax Deductible:

• A percentage of your monthly home internet bill based on business use.
• The business-use percentage of your cell phone bill.

Common Mistake:

Claiming 100% of these expenses without adequate justification can raise red flags with the IRS.

How to Avoid Missing This Deduction:

• Track your work hours to estimate the percentage of internet usage dedicated to business.
• Maintain a log of business-related calls and data usage for your phone.

Tax Deduction #4: Mileage and Vehicle Expenses

If you drive for business—whether to meet clients, attend networking events, or run errands—you can deduct vehicle-related costs.

For 2024, the standard mileage rate is $0.67 per mile driven for business use.

What’s Tax Deductible:

• Business miles driven (calculated using the IRS standard mileage rate).
• Actual vehicle expenses, including gas, maintenance, insurance, and depreciation.

Common Mistake:

Failing to log miles or relying on rough estimates, which can disqualify your claim during an audit.

How to Avoid Missing This Deduction:

• Use mileage tracking apps like FreshBooks mileage tracker.
• Record the purpose of each trip, including date, destination, and miles driven.

Tax Deduction #5. Payment Processing Fees

Every time you accept a payment through platforms like PayPal, Stripe, or Square, a small percentage is deducted as a processing fee. Over the course of a full tax year, these fees can amount to significant deductions and reduce your tax obligation.

Merchant fees are a deductible business expense for businesses but not for individuals. This deduction is reported on Schedule C (Form 1040) under ‘Other expenses.’

What’s Tax Deductible:

• Transaction fees charged by payment processors.
• Monthly fees for premium payment platforms.

Common Mistake:

Not accounting for processing fees when recording revenue. For example, if a client pays $500 but you only receive $482 after fees, your income should be recorded as $500 with a $18 deduction for fees.

How to Avoid Missing This Deduction:

• Download annual transaction reports from your payment processors.
• Reconcile your records with your business bank statements.

Tax Deduction #6: Digital Downloads and Supplies

Purchases like stock photos, templates, or design assets are easy to overlook, especially when made sporadically and by different people on your team (if you have employees). However, these digital products are essential business expenses that are a pretty standard deduction.

What’s Tax Deductible:

• Fonts, icons, and graphic templates for marketing materials.
• Stock photos and videos for websites or social media.
• One-off purchases of eBooks, guides, or business tools.

Common Mistake:

Failing to track or categorize small, one-time purchases.

How to Avoid Missing This Deduction:

• Use a dedicated business account for all purchases.
• Keep digital receipts and categorize them appropriately in your accounting software.

Tax Deduction #7: Home Office Expenses

If you operate your business from home, you may be eligible to claim itemized deductions for a portion of your household expenses. The home office is often one of the most misunderstood and under utilized tax breaks for business owners.

What’s Tax Deductible:

• Simplified method: $5 per square foot, up to 300 square feet.
• Actual expenses: A percentage of mortgage or rent, utilities, property taxes, insurance, and maintenance.

Common Mistake:

Not using the home office exclusively for business purposes. IRS rules require the space to be regularly and exclusively used for work.

How to Avoid Missing This Deduction:

• Designate a specific area of your home as your office.
• Take photos and measurements to document the space.
• If you use the simlified method for calculating a home office deduction, you’ll need to file Form 8829 along with your Schedule C.

Tax Deduction #8: Advertising and Marketing Costs

Investing in advertising and marketing is crucial for business growth, but these expenses are often overlooked when tax season rolls around. From traditional advertising to digital campaigns, these costs are fully deductible and can add up to significant savings.

What’s Tax Deductible:

• Digital advertising: Expenses for running ads on Google, Facebook, Instagram, LinkedIn, or other online platforms.
• Promotional materials: Costs of printed materials such as flyers, brochures, and branded merchandise.
• Website-related costs: Fees for SEO services, website hosting, domain registrations, and design updates.
• Event sponsorships: Payments for sponsoring community events, podcasts, or other media that promote your business.

Common Mistake:

Failing to track small, recurring advertising expenses like boosted social media posts or monthly ad subscriptions.

How to Avoid Missing This Deduction:

• Use a dedicated business credit card to pay for all marketing-related expenses.
• Keep detailed records of campaign invoices and contracts.
• Regularly review your marketing budget to ensure no expense goes unrecorded.

Tax Deduction #9: Professional Services

Whether you hire an accountant, consult a lawyer, or work with a business coach, professional service fees are not only necessary but also deductible. These services support your business operations and provide expertise that’s critical to success.

What’s Tax Deductible:

• Accounting services: Tax preparation, bookkeeping, and financial consulting fees.
• Legal services: Fees for drafting contracts, resolving disputes, or trademark filings.
• Consulting and coaching: Payments to business consultants, career coaches, or industry experts.
• Freelancers and contractors: Graphic design, web development, or other specialized services hired on a project basis.

Common Mistake:

Overlooking one-time fees or mixing personal and business consulting services in your records.

How to Avoid Missing This Deduction:

• Clearly categorize all professional service fees in your accounting software.
• Retain invoices or contracts for every service.
• Avoid paying for these services with personal accounts to maintain clear separation.

Tax Deduction #10: Bank and Credit Card Fees

Small fees from your bank or credit card company can add up quickly, but they’re easy to miss when reviewing your financial statements. These costs are fully deductible and can help offset your total taxable income.

What’s Tax Deductible:

• Monthly maintenance fees for business checking accounts.
• Interest charges on business credit card balances.
• Transaction fees for wire transfers, ACH payments, or currency conversions.
• Overdraft fees or insufficient funds charges (though best avoided).

Common Mistake:

Failing to review bank and credit card statements for small but recurring fees.

How to Avoid Missing This Deduction:

• Use separate bank and credit card accounts exclusively for your business.
• Reconcile statements monthly to ensure all fees are categorized.
• Keep copies of fee schedules for reference.

Tax Deduction #11: Health Insurance Premiums

For self-employed individuals, health insurance premiums represent a major expense that’s often deductible. This includes premiums for yourself, your spouse, and dependents under specific conditions.

What’s Tax Deductible:

• Health insurance: Coverage for medical, dental, and vision plans.
• Long-term care insurance: Premiums for policies that provide extended care services.

Common Mistake:

Assuming this deduction applies only to employees, or not meeting the eligibility criteria.

How to Avoid Missing This Deduction:

• Work with a tax professional to confirm your eligibility.
• Keep documentation, including premium invoices and proof of payment.
• Regularly review changes in tax laws that affect this deduction.

Tax Deduction #12: Charitable Contributions

If your business makes charitable donations, these contributions can be deducted under specific conditions. Whether it’s cash, goods, or services, giving back can also give your tax return a boost.

What’s Tax Deductible:

• Cash contributions: Monetary gifts to registered 501(c)(3) organizations.
• Non-cash donations: Donating inventory, equipment, or services to nonprofits.
• Sponsorships: Supporting nonprofit events or activities.

Common Mistake:

Failing to verify the nonprofit’s tax-exempt status or not keeping proper records of contributions.

How to Avoid Missing This Deduction:

• Ensure the recipient organization is a registered 501(c)(3).
• Keep detailed records, including receipts or acknowledgment letters.
• Use fair market value for non-cash donations and seek an appraisal if the value exceeds $500.

Tips to Capture Commonly Missed Deductions

1. Use accounting software: Tools like FreshBooks simplify expense tracking and reporting.
2. Maintain detailed records: Save receipts, invoices, and bank statements for all transactions.
3. Work with a tax professional: A CPA or tax advisor can help you identify deductions specific to your industry.
4. Review IRS guidelines annually: Tax laws change frequently, so stay informed about new deductions and limits.

The Difference Between a Deduction and Tax Credit

Both deductions and tax credits can significantly reduce your federal, state and local tax bill, but they work in fundamentally different ways. Whether they apply to federal or state income taxes, knowing the difference can help you maximize your tax savings and lower your tax liability.

What Are Business Tax Deductions?

• How they work: Tax deductions lower your taxable income (state and local) by subtracting eligible expenses from your gross income.
• Impact: The savings depend on your tax bracket. For example, a $1,000 deduction in a 24% tax bracket reduces your taxes by $240.
• Examples: Office supplies, marketing expenses, and vehicle mileage.

What Are Business Tax Credits?

• How they work: A tax credit directly reduces the amount of tax owed, dollar for dollar.
• Impact: Credits offer a more significant benefit than deductions since they provide a direct reduction in taxes, regardless of your tax bracket.
• Examples: Research and Development (R&D) credit, Work Opportunity Tax Credit, and energy efficiency incentives.

Common Mistakes:

Overestimating the impact of deductions or failing to explore available tax credits. Many business owners only focus on deductions and miss out on lucrative credits.

How to Maximize Both:

• Track expenses: Ensure all deductible expenses are accurately recorded throughout the year.
• Research available credits: Identify tax credits applicable to your business sector or activities.
• Work with a professional: Consult a tax expert to ensure you claim every deduction and credit you’re eligible for.

Why This Matters:

Combining deductions and credits is a powerful strategy for reducing your tax liability. For example, if your taxable income drops from $100,000 to $80,000 due to deductions, and you qualify for a $5,000 tax credit, your overall tax savings could be thousands of dollars.

Understanding and utilizing both deductions and credits ensures you take full advantage of the tax code to retain more of your hard-earned revenue.

Personal Tax Deductions That Can’t Be Claimed by a Business

Businesses enjoy a wide array of deductions for expenses related to their operations, however there are some tax deductions that individuals can claim on their personal taxes but are not applicable as business expenses.

While there’s fear when it comes to overlooked tax deductions, understanding which deductions are personal can help prevent mistakes when filing, and ensure you’re maximizing tax savings on both your personal and business returns.

What’s Deductible Personally (But Not for a Business):

1. Student loan interest paid

• What’s deductible: Up to $2,500 in interest paid on student loans, subject to income limits.
• Why it’s personal: This deduction applies to individuals who have taken out a student loan for education, but a business cannot claim student loan interest paid as a deductible expense.

2. Mortgage interest paid

• What’s deductible: Interest paid on a mortgage for a primary or secondary residence.
• Why it’s personal: While businesses can deduct interest on loans for business property, mortgage interest for a personal home is only deductible on individual tax returns.

3. Charitable contributions

• What’s deductible: Donations made to qualifying charities, including cash, property, and sometimes volunteer mileage.
• Why it’s personal: Donations made by a business can only be deducted as a business expense if they are directly related to business operations. Personal donations, however, are deductible on an individual’s tax return.

4. Medical and dental expenses

• What’s deductible: Medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI). Learn about adjusted gross income here.
• Why it’s personal: While businesses may offer health insurance as a benefit and deduct premiums, individuals can deduct out-of-pocket medical and dental expenses for themselves and their families, but businesses cannot claim these costs as personal medical expenses.

5. Personal property tax

• What’s deductible: Property taxes paid on personal property, such as your car or home.
• Why it’s personal: Property taxes related to business assets may be deducted as business expenses, but taxes paid on personal property are personal deductions on your individual return.

6. State and local taxes (SALT)

• What’s deductible: State and local taxes or sales tax paid by an individual.
• Why it’s personal: While businesses can deduct state and local income taxes paid on business-related income, SALT deductions are only available to individuals filing personal returns, and the deduction is capped at $10,000.

7. Home office deduction (for personal use)

• What’s deductible: Home office expenses when used regularly and exclusively for personal work (not business).
• Why it’s personal: If you work from home for your job and use part of your home as an office, you might qualify for a home office deduction. However, for businesses, the home office deduction applies only to the portion of the home used for business operations.

8. Casualty and theft losses (personal property)

• What’s deductible: Losses due to theft or natural disasters, like floods or fires, that affect personal property.
• Why it’s personal: A business can claim losses on business property, but individuals can only claim losses related to their personal property if the loss is not reimbursed by insurance.

9. Childcare expenses

• What’s deductible: Childcare costs incurred while working, looking for work, or attending school. This includes daycare, nanny services, after-school programs, and summer camps (as long as the primary purpose is care).
• Why it’s personal: Childcare expenses are typically considered personal costs, not business expenses, unless the care is directly tied to the business, such as hiring someone to care for a child during business hours at a home office. For personal tax purposes, these expenses may qualify for the Child and Dependent Care Credit, rather than being claimed as a deduction. Learn more about the Child and Dependent Care Credit and other child tax credit opportunities here.

Common Mistake:

Many business owners mistakenly attempt to deduct personal expenses as business expenses, particularly when using their home for both personal and business purposes. For instance, trying to claim mortgage interest on your personal home office is a common error.

How to Avoid These Mistakes:

Separate business and personal expenses: Keep clear boundaries between your business and personal finances, using separate accounts and credit cards.

Track deductions carefully: Familiarize yourself with the difference between business and personal deductions and consult with a tax professional if you’re unsure.

Stay informed: Tax laws change regularly, which leads to incorrectly claimed and overlooked tax deductions, so be sure to review the most current income tax code or work with an income tax expert to avoid missing eligible deductions.

Why This Matters:

By understanding which income tax deductions are personal and which apply to business, you can avoid costly mistakes and ensure that you’re only claiming what is allowed. This can save you time, money, and potential headaches down the line, especially if you’re audited by the IRS. Being meticulous about where and how you apply your deductions will ultimately maximize your income tax benefits across both personal and business returns.

Get Your Biggest Tax Refund Yet

Missing out on overlooked tax deductions can cost your business dearly. By staying organized and proactive, you can capture commonly missed tax deductions and ensure you’re not overpaying. Whether it’s tracking your mileage, categorizing software subscriptions, or claiming home office expenses, each standard deduction adds up to significant savings.

Running a business comes with tons of costs, but leaving money on the table because of missed deductibles or not identifying expenses incurred is something you can’t afford.

Remember income tax professionals know tax law well, can help ensure compliance, will maximize your returns, help lower your tax bill, and ensure you get a tax break at tax time.

Don’t let missed itemized deductions eat into your hard-earned profits!

This post was updated in November 2024.