Covenant Tax and Accounting Solutions (CTAS) helps business owners understand which expenses qualify as tax deductions. Properly leveraging these deductions can reduce taxable income, improve cash flow, and strengthen overall financial performance.

Startup Costs

If you recently launched your business, you may deduct up to $5,000 in startup costs, including:

• Legal and accounting fees
• Market research
• Initial advertising

Phaseout Rules:

• Deduction reduces dollar-for-dollar if startup costs exceed $50,000.
• No immediate deduction if costs exceed $55,000; costs must be amortized over 15 years (180 months).

Tip: Distinguish between startup costs and organizational costs—both qualify for up to $5,000 deductions if phaseout thresholds aren’t exceeded.

CTAS Guidance: Structure deductions strategically if expenses exceed $5,000. Generate revenue early to transition out of “startup” status, potentially allowing more immediate deductions.

Home Office Deduction

If you operate from home, the workspace must be used regularly and exclusively for business purposes. Two calculation methods exist:

      Simplified Method

• $5 per square foot, up to 300 sq. ft. (Max $1,500)

      Regular Method

• Deduct a prorated portion of mortgage/rent, utilities, insurance, repairs, and maintenance

CTAS Guidance: Clearly define your home office space and keep detailed records. Exclusive business use is required.

Lease Agreements and Utility Expenses

• Rent: Fully deductible for leased office, retail, or warehouse space at fair market value.
• Utilities: Deduct electricity, water, gas, internet, and phone services proportional to business use.

CTAS Guidance: Keep lease agreements and payments documented. Below-market arrangements may limit deductions.

Office Supplies and Equipment

• Supplies: Pens, paper, ink, and other consumables are fully deductible the year purchased.
• Minor Equipment: Small electronics, office chairs, accessories may be expensed under Section 179 (if under limits).
• Larger Assets: Vehicles, machinery, high-cost furniture must be capitalized and depreciated; may qualify for Section 179 or bonus depreciation.

CTAS Guidance: Keep receipts and logs. Determine whether immediate expensing or depreciation is most advantageous.

Business Insurance Premiums

Deductible policies include:

• Liability insurance
• Property insurance
• Workers’ compensation
• Cyber liability insurance

CTAS Guidance: Life or disability insurance may not be deductible. Verify each policy’s eligibility based on your business.

Employee Salaries, Wages, and Benefits

• Salaries, wages, bonuses, and employer contributions to health insurance or retirement plans are deductible.

CTAS Guidance:

• Bonuses for accrual-basis taxpayers must be fixed, determinable, and paid within 2½ months after year-end.
• Contingent bonuses can only be deducted in the year paid.

Payments to Independent Contractors

• Payments for services are deductible.
• Payments ≥$600 require Form 1099-NEC filing.

CTAS Guidance: Obtain a completed W-9 from each contractor to ensure accurate reporting.

Advertising and Marketing Expenses

Deductible expenses include:

• Branding (logos, slogans)
• Online advertising (Google Ads, social media)
• Website development and maintenance
• Print materials (business cards, brochures)
• Public relations fees

CTAS Guidance: Expenses must be business-related. Lobbying or personal promotion is not deductible. Maintain thorough documentation.

Business Travel and Meal Expenses

Deductible travel costs include:

• Transportation: Air, train, bus, or car travel for business
• Lodging: Hotels or accommodations away from home
• Meals:
  • Standard business meals: 50% deductible
  • Restaurant meals under OBBBA (2025–2026): 100% deductible
• Incidentals: Laundry, dry cleaning, business calls

CTAS Guidance: Consider using the federal per diem rates ($86/day high-cost areas, $76/day others for 2025) to simplify record-keeping.

Professional Service Fees

Deduct fees paid to accountants, attorneys, consultants, and other experts related to business operations.

CTAS Guidance: Fees associated with acquiring capital assets must be added to the asset’s basis and depreciated over time.

Education and Training Costs

Deductible education must:

• Be required by law to maintain your position, or
• Maintain/improve skills for your current business

Non-deductible: Courses for minimum requirements or to qualify for a new trade.

Bonus for Employers: Educational Assistance Programs allow $5,250 per employee per year in tax-free benefits.

CTAS Guidance: Keep detailed records of tuition, books, and supplies.

Depreciation of Business Assets

• Section 179 Deduction: Immediate expensing up to $1,250,000 (2025), phased out over $3,050,000.
• Bonus Depreciation: 40% for 2025 on eligible assets.

Smaller assets (<$2,500) are generally deductible immediately.

CTAS Guidance: Evaluate which method provides the greatest benefit; consult a tax professional.

Business Loan Interest Deduction

Deduct interest on loans, lines of credit, or credit cards used exclusively for business.

Key Points:

• Only interest, not principal, is deductible
• Legal liability and intent to repay required

CTAS Guidance: Keep detailed records; avoid mixing personal and business expenses.

Software and Subscription Costs

Deductible:

• Purchased software (expense or depreciation, Section 179 optional)
• SaaS/cloud subscriptions
• Industry publications

CTAS Guidance: Maintain invoices, separate business vs. personal use, and periodically review subscriptions.

Business Vehicle Expenses

Options:

1. Standard Mileage Rate: 70¢ per mile (2025)
2. Actual Expenses: Fuel, insurance, maintenance, repairs, depreciation

CTAS Guidance: Choose the method that maximizes deduction; keep detailed logs.

Legal and Licensing Fees

Deduct fees for licenses, permits, trademarks, and regulatory compliance.

CTAS Guidance: Maintain thorough records for compliance.

Retirement Plan Contributions

• SEP IRA: Up to 25% of compensation or $70,000
• SIMPLE IRA: Employee deferrals $16,500 + $3,500 catch-up
• 401(k): Employee contributions $23,500 + $7,500 catch-up; combined limit $70,000 ($81,250 ages 60–63)

Retirement Plan Startup Tax Credit: Up to $5,000/year for 3 years

CTAS Guidance: Regularly review contributions to maximize tax benefits and compliance.

Taking full advantage of small business tax deductions can reduce taxable income, improve profitability, and strengthen cash flow. Because tax laws change frequently, working with a tax professional ensures your business maximizes benefits while remaining compliant.