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

Which Business Expenses Are Deductible?

One of the easiest ways to save your business money is to reduce your income tax bill. You can achieve this by ensuring you’re claiming every tax deduction that applies to your business. But which business expenses are deductible?

In this article, we’ll explore some of the most common deductibles that help many 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 so that you can 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 and generally include those that are considered “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, but not necessarily 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 to any degree.

 

Which business expenses are fully deductible?

Many small businesses can seek a dollar-for-dollar deduction for the following business 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

.

Specific rules apply to each of these deductions. Read Publication 535, Business Expenses, and consider contacting a certified public accountant (CPA) to understand which deductions apply to your business and to what extent.

Would you like to connect with a CPA? Click the button below to get started:

 

 

Which other expenses are deductible?

As mentioned above, certain expenses aren’t eligible for a dollar-for-dollar deduction, but 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, provided they 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

.

The general rule of thumb is that any expense that isn’t ordinary or necessary for your line of work isn’t eligible for an IRS deduction. If you need help making this determination, visit the IRS Interactive Tax Assistant page or contact a CPA.

Would you like to connect with a CPA? Click the button below to get started:

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

It’s essential to track your business expenses throughout the year because it will be nearly impossible to remember every item at tax time—and by forgetting key items, you may miss out on significant tax savings. To track your expenses, you can invest in a robust bookkeeping program or work with a professional bookkeeper who can handle this work for you.

Our preferred bookkeeping solutions include:

 

If you’d rather get one-on-one support from a professional bookkeeper, consider Bench. This monthly fee-based service connects small business owners with human bookkeepers who understand the ins and outs of expense tracking, reporting, and management, allowing owners to focus on other business-critical tasks. You can explore this service through this link:

 

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

 

How can I deduct my expenses?

The forms and rules you’ll follow to deduct expenses depend on the organizational structure of your business. Work with your accountant to complete the appropriate forms and ensure you maintain proper documentation of your eligible expenses.

 

What’s next?

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