Expenses. We can’t escape them. But with careful attention, you can use them to reduce your tax liability. When you know what business expenses to deduct, you’ll be certain you’re paying no more than needed. So, without further ado, what are business expenses?
Read on to learn how to maximize your profit when you use legitimate business expenses to reduce your taxes.
What are business expenses?
Business expenses are costs you incur while operating your business. Types of business expenses include everything from storefront rent to payroll costs for small business. Your expenses play a role in whether you’ll have a net profit or loss during a time period. There are both fixed (costs that don’t change) and variable (costs that do change) business expenses.
You record expenses for business on your income statement. Include business expenses under the revenue section, and deduct them to arrive at your net profit or loss.
Business expenses list
Expenses vary by business. You might be able to cut your expenses depending on your business model and budget.
So, what are some common small business expenses? Use our business expenses list to find out:
- Rent or mortgage payments
- Office equipment
- Payroll costs (e.g., wages, benefits, and taxes)
- Advertising and marketing
- Small business insurance
- Loan payments
- Interest payments
- Business fees (licenses, permits, subscriptions, etc.)
Small business expenses and taxes
Businesses that operate to make a profit can report their expenses to reduce their tax liability. To deduct eligible business expenses, it needs to be both ordinary and necessary, according to the IRS:
- Ordinary: Expenses that are common in your business
- Necessary: Expenses that are helpful and appropriate in your business
Depending on the type of expense, you might be able to deduct the full amount. Other expenses are only partially deductible. And, some expenses are not deductible.
Take a look at the following business expenses examples you can fully or partially deduct:
- Self-employment tax: You can deduct half of your self-employment tax liability if you’re self-employed.
- Home office expense: Claim the home office tax deduction if part of your home is used regularly and exclusively for business.
- Business mileage: If you use a personal vehicle for business, you can claim the business mileage deduction for any business miles driven.
- Meals and entertainment: Depending on the situation, you may be able to claim 50% or 100% of meals and entertainment expenses.
- Gifts of nominal value: You can deduct the cost of merchandise of nominal value or other de minimis items you give to employees on holidays.
- Employee wages: Generally, you can deduct the wages, salaries, bonuses, or other non-cash compensation you give employees.
- Advertising expenses: If you have reasonable advertising expenses related to your business, you can typically deduct them.
- Rent: If you rent property for your business, you can deduct the amount.
For more information on deductible business expenses, check out IRS Publication 535, Business Expenses.
Some business expenses are not deductible. Non-deductible expenses include:
- Lobbying expenses
- Political contributions
- Governmental fines and penalties (e.g., tax penalty)
- Illegal activities (e.g., bribes or kickbacks)
- Demolition expenses or losses
- Education expenses incurred to help you meet minimum
- requirements for your business
- Legal fees incurred to acquire business assets (usually)
You also cannot deduct “capital expenses” in one lump sum. Capital expenses include things like business vehicles and other assets. These expenses depreciate over time, and you can deduct the depreciation amount.
Consult IRS Publication 535 for more information on non-deductible small business expenses.
Business expense tips
When it comes to handling your business expenses, the following tips are a must:
- Separate personal and business expenses
- Make a budget (and try to stick to it)
- Keep good records
- Know which expenses you can deduct
First and foremost, you need to split up your personal and business expenses. In addition to having a separate business bank account, you need to separate your personal and business expenses. You can’t claim personal expenses. And, if you have an expense for something that is used partly for business and personal reasons, you can divide and deduct the business portion. For example, set up a separate home office space for the home office deduction.
If you want to avoid overspending and falling into negative cash flow territory, create and update an annual budget. Take both fixed and variable expenses into account when making your budget.
You’ve heard it once, twice, countless times—keeping detailed records is a must in business. The same goes for your expenses. Track everything you spend and keep digital or paper receipts. If you can’t get a receipt, handwrite a record including the date, reason for the expense, amount, and vendor.
Knowing which expenses you can deduct is essential when claiming deductions. Again, some business costs are never deductible. If you’re ever in doubt about deductible business expenses, check with your tax accountant — and stay safe, sane, and profitable!
If you need an easy way to learn how to organize your business finances, consider using Patriot’s online accounting software. Plus, we offer free, USA-based support. Start your free trial now!
This article has been updated from its original publication date of March 12, 2015.This is not intended as legal advice; for more information, please click here.