One note for entrepreneurs in every industry: if you work out of a home office, you can take the home office deduction. To qualify for this deduction your home office space will need to meet the following three criteria:
- You must regularly use that part of your home for conducting business
- Your work area can only be used for business activities, which means personal use of your work area is not allowed
- You must use your home office as the principal place of business for your ecommerce business
If you occasionally work outside of your home office (such as in a coworking space or another office), it’s ok to still claim this deduction as long as you regularly and substantially use your home office to do work.
If you use the simplified option for claiming this deduction, you can deduct $5 per square foot of home used for business (up to a maximum of 300 square feet).
The IRS is known for carefully scrutinizing the home office deduction, so It’s a good idea to take pictures of your home office workspace and file the pictures with your other tax records and receipts each year. That way, if you’re ever audited you’ll be able to prove that your home office is only used for business purposes.
Now, let’s move on to industry-specific deductions.
Retail
Retailers that have physical products and/or storefronts have specific deductions they can take. Here are key areas to focus on.
Cost of Goods Sold (COGS): Retailers can deduct the cost of goods sold, which includes the expenses directly associated with the production of goods or acquisition of inventory. Keeping meticulous records of inventory transactions is crucial for accurate deduction calculation.
Lower of Cost or Market (LCM): If the value of inventory drops below its cost, retailers may be eligible for a deduction under the LCM rule. Regularly assess inventory values to identify potential deductions.
Store maintenance: Routine maintenance and repairs to storefronts, shelving units, and other physical spaces are generally deductible. Keep detailed records of expenses related to the upkeep of retail spaces.
Advertising costs: Expenses related to advertising and marketing campaigns, both online and offline, can be deducted. This includes costs for social media promotions, print advertisements, and other promotional activities.
Website development: For retailers with an online presence, expenses related to website development, maintenance, and hosting can be considered deductions.
Point of sale equipment: Investments in POS systems, including hardware and software, are typically deductible. Additionally, ongoing maintenance and upgrade costs can be included.
Ecommerce
We already wrote a whole guide dedicated to eCommerce tax deductions. Some deductions for other industries listed below may also apply.
Service businesses
Service businesses like consultancies, marketing agencies, freelance writers, and graphic designers often have unique deduction opportunities related to client interactions and professional development.
Client entertainment or meetings: Expenses related to entertaining clients, such as meals and events, can be partially deductible. You’ll want to make sure you keep thorough records, including the business purpose of the entertainment, and always pay for business-related client expenses with your business account, not a personal one.
Business travel expenses: Deductions may be claimed for travel expenses incurred for business purposes. This includes airfare, accommodation, meals, and transportation during business trips. Just make sure you keep all your credit card receipts and keep those expenses separate from your personal expenses.
Training and education: Expenses for professional development, including workshops, conferences, and courses, are generally deductible. Make sure that the training or educational opportunity is directly related to your business.
Specialized equipment: Service industries often require specific equipment for service delivery. The costs associated with purchasing and maintaining such equipment are eligible for deduction.
Manufacturing
Key deduction areas for manufacturers include:
Depreciation of machinery: Manufacturers can deduct a portion of the cost of machinery and equipment over time through depreciation. Understanding the applicable depreciation methods and schedules can be complex, so you may want to consult a tax professional first, especially if the equipment you’re depreciating represents a significant investment.
Raw materials: The cost of raw materials used in the manufacturing process is deductible. Keep detailed records of material purchases and usage.
Production facility expenses: Expenses related to the operation and maintenance of production facilities, including utilities and rent, can be deducted.
Research and development expenses: Manufacturers investing in research and development activities may qualify for R&D tax credits. Document R&D expenses, including employee wages, supplies, and contract research costs.
Content Creators
Content creators, including artists, writers, and musicians, can also take advantage of several specific tax deductions. Here are key areas to focus on:
Artistic tools and instruments: The cost of equipment directly used in the creation of content, such as cameras, musical instruments, and art supplies, can be deducted.
Content creation software: Expenses for software used in the creation, editing, and production of content, such as graphic design software or music production tools, are deductible.
Studio rental and maintenance: Content creators operating out of studios can deduct expenses related to the rental, maintenance, and utilities of their creative spaces.
Promotional expenses: Costs associated with promoting content, including advertising, social media promotion, and website development, are generally deductible.
Technology and IT Services
Technology-driven businesses can capitalize on a variety of deductions related to innovation and digital infrastructure. These include:
Software development costs: Expenses related to the creation and improvement of software, including coding, testing, and debugging, can be deducted.
Computer hardware: The cost of computers, servers, and other hardware necessary for business operations is generally deductible.
Cybersecurity investments: Expenses incurred to protect digital assets and sensitive information, such as cybersecurity software and consulting services, may be deductible.
Innovation and research expenses: Businesses involved in technological innovation, like app developers, for example, may be eligible for R&D tax credits. Make sure to document any research expenses, employee overtime or contractor payments related to your R&D efforts, and other related costs.
Healthcare and wellness
Those in the healthcare and wellness industry can deduct expenses related to equipment, operational costs, and certain insurance premiums, among others.
Medical equipment purchases: The cost of acquiring and maintaining medical equipment used in patient care is deductible.
Clinic operation costs: Expenses related to the operation of healthcare facilities, including rent, utilities, and administrative costs, can be deducted.
Professional liability insurance: Healthcare professionals can deduct the costs of professional liability insurance premiums.
Electronic health records (EHR) systems: Costs associated with implementing and maintaining EHR systems are generally deductible.
Specialized tools: Certain professionals, such as doctors or dentists, may deduct the costs associated with acquiring and maintaining specialized tools.
Professional services
Professional service providers, such as lawyers, business consultants, and accountants, can benefit from deductions on insurance, equipment, and professional training and education.
Professional research tools: Expenses related to the purchase and maintenance of research tools, software, and databases can be deducted.
Professional liability insurance: Insurance premiums to cover professional liability are deductible for professional service providers.
Continuing education: Expenses for professional development, including seminars, courses, and workshops, are typically deductible.
Deductions in any industry can add up and significantly reduce your tax liability, so it’s worthwhile to take the time throughout the year to track your expenses, maintain records, and identify the deductions you qualify for. If you want professional support, Bench’s bookkeeping services and tax team can help make sure that you’re taking advantage of every deduction you qualify for.
