Which Business Expenses Are Deductible?

Katie Fleming

Katie Fleming

Co-founder and COO of Owner Actions

A person touches a tablet screen with one hand and holds a credit card in the other, determining which business expenses charged to the card are deductible for tax purposes

One of the easiest ways to save your business money is to reduce your income tax bill. Doing this means claiming the tax deductions that apply to your business. But which business expenses are deductible?

In this article, we’ll explore some of the most common deductibles that help businesses save considerable amounts of money. But take note: Some of these deductibles may not apply to you. Be sure to speak with a tax attorney to find tax savings strategies that apply to your business.

Further, please note that this article contains common industry practices and not professional legal, tax, or financial advice. This article does not create an attorney-client relationship, and it should not be considered a substitute for attaining an attorney’s advice.

 

What is a tax deduction?

A tax deduction is an expense you can subtract from your taxable income to reduce the size of your tax bill. Not every business expense qualifies. Deductible expenses must meet the IRS’s rules provided in Publication 535, Business Expenses. They typically include those that are “ordinary and necessary” for your business or industry.

In this context, “ordinary” means that the expense is common to most taxpayers in similar lines of work. “Necessary” means that the expense is helpful and appropriate for your business’s success. It doesn't necessarily mean that an expense that is indispensable.

Many business expenses can be deducted dollar for dollar. Some others can be partially deducted, and a few expenses can’t be deducted in any way.

 

Which business expenses are fully deductible?

Many businesses can take a dollar-for-dollar deduction for these common expenses:

Accounting expenses

Advertising and promotion costs

Bank and credit card fees

Business meals for office parties

Business vehicle costs

Consultant fees

Continuing education costs

Contract labor fees

Credit and collection fees

Delivery charges

Depreciation

Domain names and site hosting fees

Dues

Employee benefit programs

Equipment rentals

Factory expenditures

Gifts up to $25 in value or promotional gifts up to $4 in value

Home office expenses

Insurance premiums

Interest paid to lenders or creditors

Internet costs

Legal and professional fees

Licenses and permits

Maintenance and repair costs

Moving expenses

Office and other supplies

Outplacement services

Penalties and fines that meet specific criteria and don’t pertain to a violation of a law

Pension and profit-sharing plans

Postage

Printing expenses

Rent expenses

Salaries, wages, bonuses, and employee awards

Sales costs (including commissions)

Security costs

Software

Specific startup expenses occurring in the first year of operations (up to $5000 in value)

State and local taxes

Telephone

Trade discounts

Travel

Utilities

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Specific rules apply to each of these deductions. Read Publication 535, Business Expenses, and consider working with an accountant to understand which deductions apply to your business (and to what extent).

Would you like to connect with an accountant? Check out the teams at these firms:

 

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Which other expenses are deductible?

As mentioned above, certain expenses aren’t eligible for a dollar-for-dollar deduction. Still, you may be able to claim a partial deduction for those costs. Common expenses in this category include:

Business meals in other circumstances, including client meetings or
employee meals, that are offered for a specific business purpose and aren’t lavish

The use of a personal vehicle for business purposes, where either the actual
expenses incurred or a standard mileage rate is calculated and reported for deduction

Gifts that exceed $25 in value (only the first $25 is eligible for deduction)

Promotional gifts that exceed $4 (only the first $4 is eligible for deduction)

Which business expenses are not deductible?

Some business expenses aren’t eligible for any form of deduction. Examples include:

Amounts paid to influence legislation or sponsor a political campaign or event

Anticipated liabilities

Bribes and kickbacks

Capital expenses and improvements

Dues and memberships to social clubs

Expenses that have been accounted for through your cost of goods sold

Personal, living, and family expenses

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Here's a general rule of thumb. Any expense that isn’t ordinary or necessary for your line of work isn’t eligible for an IRS deduction.

Need help with this determination? Visit the IRS Interactive Tax Assistant page or contact a CPA.

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How can I keep track of my business’s eligible expenses?

It’s a must to track your business expenses throughout the year. Why? Because it'll be nearly impossible to remember every item at tax time. By forgetting key items, you could miss out on significant tax savings.

To track your expenses, you can invest in a bookkeeping program or work with a professional bookkeeper who can handle this work for you.

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Here are some of our favorite programs:

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If you’d rather get one-on-one support from a professional, consider Bench. This monthly, fee-based service connects owners with human bookkeepers who have mastered the ins and outs of expense tracking, reporting, and management. You can check out this service here:

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Here are a few other services we like to recommend:

 

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Xendoo

Be Tax Ready All Year Long

With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo's site for details.

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Be sure to keep detailed receipts of the expenses for which you’re seeking a deduction. If possible, keep records of the date, location, purpose of the cost, and other key factors that will help you prove that the expense was ordinary and necessary for your business.

 

How can I deduct my expenses?

The forms and rules you’ll follow to deduct expenses depend on how your business is structured. Work with your accountant to complete the right sets of forms and properly document your expenses.

 

What’s next?

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