Which Expenses Are Deductible?
If you’re a small business owner, you’ve likely asked yourself at one point “can I deduct this on my taxes?” Here’s a quick rundown on what you can – and can’t – claim as a business deduction.
The IRS says you can only claim an expense as a business deduction if it’s both ordinary and necessary.
An ordinary expense is something that most other businesses in your industry will have. Paying for cheese and tomato sauce is ordinary if you own a pizzeria, but those same expenses would be incredibly unusual for a landscaping company.
A necessary expense is something that is “helpful and appropriate” for your business (note that despite the name, it doesn’t have to be absolutely ‘necessary’ for your business to function.) The costs associated with traveling to a conference may be “helpful and appropriate” expenses if they help you meet new clients to grow your business.
Common Deductions Almost Every Business Will Have
Regardless of industry, there are going to be some expenses that most business owners will have simply due to the costs associated with running a business. These include:
Home Office – if you’re working out of your home, you can claim this special deduction (even if you rent)
Rent – the costs associated with leasing office space are deductible
Advertising / Marketing – the costs for running ads on Google or Facebook, printing flyers or brochures, or paying fees on Yelp or Thumbtack can all be deducted
Utilities – if you’re responsible for paying for the electric or heat at your office, you can deduct those
Legal / Professional Fees – if you met with a lawyer to get your business of the ground, you can deduct those costs. If you hire someone to help with tax or bookkeeping (hint, hint) those are deductible as well.
Insurance – Professional Liability insurance is deductible, as are insurance premiums you pay on your rented office space
Salaries / Wages – if you hire employees or pay contractors, those costs are all deductible
Interest Expense – the interest (but not the principal) you pay on a bank loan is deductible
Office Supplies – the money you spend on paper, pens, printer ink and other supplies all count
What is NOT Deductible
Now that we’ve covered a lot of things you can deduct, here is a list of things that can not be deducted:
Taxes – state and local taxes are deductible on your personal return (if you itemize), but they aren’t business expenses and shouldn’t be on your business tax return
Fines / Penalties – If you received penalties for paying your taxes late, a fine from the city government, or a parking ticket, you’re out of luck.
Commuting Expenses – costs associated with travel from your home to your regular work location are not deductible. However, if you make a special work-related trip that’s farther than your usual commute, that may be deductible.
Entertainment Expenses – If you take a prospective to a baseball game, you cannot deduct the expenses. These actually were partially deductible for a while, but the 2017 tax law has eliminated this deduction.
Country Club Dues – these are not deductible, even if you take clients out golfing. Sorry.
Clothes – your new outfit doesn’t count as a business expense, unless you can’t wear it for anything but work. So a new suit is not deductible, but if you have to buy your own pilot’s uniform you can deduct those costs.
Your cellphone bill – if you have a phone you use exclusively for work, you can deduct the entire amount. But if you only have one phone that you use for both personal and business then you do not have a “work phone,” and you are not entitled to deduct the full amount of the bill. Estimate the percentage used for work and claim that as an expense instead.
When in doubt…
A very common saying you’ll come across when discussing business expenses is “pigs get fat, but hogs get slaughtered.” You should absolutely take every deduction you’re entitled to. If you stretch the boundaries too far, however, they’re going to break and the IRS will be asking you some uncomfortable questions. A good rule of thumb is to picture yourself explaining an expense to an IRS auditor or a judge – if you would have no problem telling them what the expense was for then you’re probably fine to deduct it. If you would be embarrassed to explain what the amount relates to, then you might want to leave it off of your tax forms.
If you’d like to discuss any expenses not covered above, feel free to drop us a message.