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 tax 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 tax 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).
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Which other business expenses are tax 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 |
The use of a personal vehicle for business purposes, where either the actual |
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 tax 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 my business keep track of the expenses that are tax deductible?
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 a few other services we like to consider:
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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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