A Guide to Business Expenses for Taxes

As you start your business, it's essential to understand what expenses you can deduct on your taxes. The IRS allows businesses to deduct expenses that are necessary and ordinary for the operation of the business.

Business expenses for taxes can be categorized into two main types: deductible and non-deductible. Deductible expenses include things like rent, utilities, and equipment, which are necessary for running your business. Non-deductible expenses, on the other hand, are personal in nature and cannot be claimed on your taxes.

To qualify as a deductible expense, your business expense must be related to your business and not personal. For example, if you use your home office for both personal and business purposes, you can only deduct the business use percentage of your rent or utilities.

Recommended read: Can You Deduct Life Insurance Premiums as a Business Expense

Business expenses can be a bit tricky to navigate, but understanding the basics can save you a lot of headaches come tax time. Section 162 of the Internal Revenue Code (IRC) outlines the guidelines for what constitutes a business expense.

To qualify as a business expense, an expense must be ordinary and necessary. Ordinary means it's common in the industry, and necessary means it's required for the business to operate.

Some business expenses are fully deductible, while others are only partially deductible. Here are some examples of fully deductible expenses:

It's worth noting that these expenses must be directly related to the business, and not personal in nature.

The income statement is the primary financial statement used by businesses to record their expenses and determine their taxes.

Most businesses have three categories of expenses: direct costs, indirect costs, and interest. Direct costs are expenses that can be directly linked to the production of a product or service, such as the cost of materials or labor.

Indirect costs, on the other hand, are expenses that are not directly related to the production of a product or service, such as rent or utilities. Interest is also a category of expense that is used to calculate the cost of borrowing money.

Additional reading: Prepaid Expenses Depreciation Expense Accrued Expenses

Recording expenses is a crucial part of running a business, and it's essential to understand how it's done.

The primary financial statement used to record expenses is the income statement.

Most businesses have three categories of expenses: direct costs, indirect costs, and interest.

Direct costs are expenses that can be directly attributed to a specific product or service, such as the cost of materials or labor.

Indirect costs, on the other hand, are expenses that are not directly related to a specific product or service, such as rent or utilities.

Interest is a type of expense that is incurred when borrowing money to finance a business.

Businesses use the income statement to determine their taxes, making accurate expense recording essential for financial planning.

Consider reading: Ebiat Equation Income before Taxes and Interest Expense

Tracking your expenses can be as simple as using a spreadsheet or a budgeting app. You can categorize your expenses into needs, wants, and savings goals to help you stay on track.

Readers also liked: How to Report Business Expenses on Taxes

A good starting point is to identify your income and fixed expenses, which include rent, utilities, and groceries. You can use the 50/30/20 rule as a guideline, where 50% of your income goes towards fixed expenses, 30% towards discretionary spending, and 20% towards savings.

You can use a budgeting app to track your expenses, such as Mint or Personal Capital, which can connect to your bank accounts and credit cards. These apps can also provide you with personalized spending reports and budgeting advice.

It's essential to regularly review your expenses to ensure you're staying within your budget. You can do this by checking your account balances, reviewing your spending reports, and making adjustments as needed.

Suggestion: For a Firm That Must Pay Income Taxes Depreciation Expense

Business expenses can be categorized into different types, each with its own rules and limitations. Direct costs are expenses that are directly related to producing a product or service, such as the cost of materials and labor.

Indirect costs, on the other hand, are expenses that are not directly related to producing a product or service, but are still necessary for the business to operate. These can include expenses such as executive compensation, general expenses, depreciation, and marketing costs.

Here are some examples of indirect costs:

Depreciation is a type of indirect cost that refers to the expense of business assets over their useful life. This can include expenses such as the cost of computers, furniture, property, equipment, trucks, and more.

Ordinary Expenses are a key part of what makes a business expense deductible. According to the IRS, they must be normal and widespread in the industry.

In other words, if your business expense is something that most other businesses in your industry do, it's likely ordinary. This can include things like office supplies, software, and equipment.

One thing to keep in mind is that lobbying expenses are not ordinary and are therefore not deductible. This includes anything from buying advertising space to hiring professional lobbyists.

Here are some examples of ordinary business expenses:

These are just a few examples, but the idea is to focus on expenses that are essential to running your business, not just personal indulgences.

Indirect costs are a crucial part of understanding your business's financials. They're subtracted from gross profit to identify operating profit, also known as earnings before interest and tax.

Typical indirect costs include executive compensation, general expenses, depreciation, and marketing costs. Executive compensation is a significant indirect cost that can vary greatly depending on the size and type of business.

Depreciation is a tax-deductible expense on the income statement and is classified as an indirect expense. You can deduct depreciation expenses over a number of years, which typically include the costs of computers, furniture, property, equipment, trucks, and more.

Gifts, meals, and entertainment costs are also indirect costs, but be aware of the IRS limits on these expenses. For example, you can usually deduct 50% of the cost of providing meals to employees, although certain meals may be fully deducted.

Office furniture is considered a type of office supplies and can be deducted just like printer paper or cleaning products.

Using a business credit card is a great way to keep track of your business expenses. You can use it to make purchases for your business and then deduct the expenses at tax time.

It's best to keep your personal and business expenses separate. This can be tricky, especially if you're using your personal credit card for business expenses.

Using a business credit card helps you monitor your expenditures and ensures you deduct every allowable business expense.

You might like: Personal and Business Taxes

Meals and entertainment expenses can be a bit tricky to navigate, but don't worry, I've got the lowdown. The IRS allows meals and entertainment expenses related to establishing and maintaining a business to be deducted as part of a business tax return.

To qualify for a meal expense deduction, the meal must be ordinary and necessary in your trade or business. You can deduct meals with business associates at your place of business, a restaurant, or other location.

Meals incurred while traveling away from home or for business-related meals with business associates can be deducted. You can deduct only 50% of the cost of business meals, unless it's a qualified business meal provided by a restaurant, in which case you can deduct 100% of the cost.

Entertainment expenses, on the other hand, are a bit more complex. Generally, entertainment expenses are no longer deductible, starting with tax years after 2017. However, if you're traveling away from home for business, you can deduct a wide variety of travel-related expenses, including meals and overnight lodging.

Here are some examples of deductible meal expenses:

To claim the home office deduction, your workspace must be used regularly and exclusively for business. This means having a specific area of your home that's used only for work.

Exclusive use is a key factor – if the kids play in your home office or you use it as a living room, you can't claim the deduction. But if you've converted a spare room into a dedicated workspace, that's a different story.

Check this out: Tax Deduction

To qualify for the home office deduction, you must use your home office as your principal place of business or meet clients there on a regular basis. This might involve administrative tasks like billing customers, keeping books, or setting appointments.

You can also claim the deduction if you store inventory or product samples in your home office, or if you operate a day care facility. The size of your deduction depends on the percentage of your home that's used for business.

To calculate this percentage, you can either divide your home office's square footage by the total square footage of your house, or divide the number of rooms used for business by the total number of rooms in your home.

Here are the two most common methods of calculating business percentage:

The IRS has a simplified option for claiming the deduction, which uses a prescribed rate multiplied by the allowable square footage used in the home. For 2024, the prescribed rate is $5 per square foot with a maximum of 300 square feet.

Professional fees can be a significant expense for businesses, but they're often deductible on your taxes. You can deduct fees paid to professionals like attorneys and accountants if they relate to your business.

If you purchase depreciable business assets, the fees paid for professional services are added to the tax basis of the asset. For example, if you buy a pool-cleaning route for $22,500 and pay $2,500 in professional fees, your cost basis is $25,000.

You can also deduct legal fees to incorporate or organize your business as a partnership. This can be a big help if you're just starting out.

In 2024, you can deduct up to $5,000 in business start-up expenses and another $5,000 in organizational expenses in the year you begin business. Any additional expenses need to be amortized over 15 years.

As a sole proprietor, you can deduct accounting and tax preparation fees on Schedule C, to the extent that they're related to your business.

Rent and property expenses can be a significant chunk of your business costs. You can deduct your lease or rental payments from taxes if you rent your business property.

Renting equipment or machinery for your business can be fully deductible. This includes items like printers, copiers, vans, and trucks.

If you lease equipment or machinery, you can also claim depreciation on it, but these costs must be deducted over several years with a Section 179 deduction.

Renting your business property can also mean you're eligible for mortgage interest, insurance, utilities, repairs, and depreciation deductions.

Broaden your view: Business Personal Property Taxes

Employee compensation is a crucial business expense that can be deducted from your taxable income. You can deduct salaries, bonuses, and commissions, as well as payroll taxes and fringe benefits like health insurance and sick pay.

W-2 recipients and independent contractors, whom you issue a Form 1099-NEC to, are eligible for this deduction. You can also write off qualified benefits such as group-term life insurance, adoption assistance, and educational assistance.

Here are some examples of deductible fringe benefits:

Employee salaries are fully deductible, including bonuses and commissions, but this doesn't apply to sole proprietors, partners, and LLC members, who are not considered employees.

If you use a car entirely for business purposes, you can deduct the related expenses. Keep in mind that you'll need to keep receipts and a careful log of mileage and other costs associated with the vehicle.

The IRS standard mileage rate can be a convenient way to calculate business use of your car. For the first half of 2022, this rate was 58.5 cents per mile.

You can deduct anything considered a car expense if you have a car for business purposes. However, you must have records that prove business usage.

The standard mileage rate has increased over the years, with a rate of 62.5 cents per mile from July 1 through December 31, 2022.

On a similar theme: Can You Write off Car Insurance for Business

To qualify as a deductible expense, an expense must be both ordinary and necessary for your business. This means it's common and accepted in your industry, and it's helpful and appropriate for your business.

According to the IRS, deductible expenses include direct expenses, indirect expenses, and interest on debt. You can also deduct automobile expenses for visits to clients, vendors, suppliers, or travel to business meetings away from your regular workplace.

Here are some examples of deductible expenses:

Remember to keep accurate records of your expenses, including receipts and a log of mileage and other costs associated with your vehicle. This will help you determine what expenses are deductible and ensure you're taking advantage of all the deductions available to your business.

Business expenses are deductible and lower the amount of taxable income.

The IRS defines allowable business deductions as costs that are "ordinary and necessary" for the industry in which the business operates.

Direct expenses, indirect expenses, and interest on debt are the main deductible categories.

You can deduct automobile expenses for visits to clients, vendors, suppliers, or travel to business meetings away from your regular workplace.

If you loaned money to customers, suppliers, or employees who never paid you back, you may be able to claim a bad-debt deduction to offset part of your loss.

You can deduct expenses for employees, including salaries, bonuses, payroll taxes, fringe benefits such as health insurance, sick pay, and vacation pay.

Deductible expenses are those that are essential to running your business and must be ordinary and necessary.

You can't deduct lobbying expenses, political donations, traffic tickets, clothing for work (except for work uniforms), commuting to and from the office, entertainment expenses, business gifts exceeding $25, and travel expenses for companions (unless employees).

Here are some eligible expenses:

Keep accurate records of your business expenses, including receipts and a log of mileage and other costs associated with your vehicle, to ensure you can claim them as deductions.

Non-deductible expenses are a crucial aspect of business expenses to understand. They're the expenses that the IRS won't let you write off, no matter how much you'd like to.

Some non-deductible expenses include bribes and kickbacks. These are not only not deductible, but they're also against the law.

Fines and penalties are also non-deductible. If you break the law and have to pay a fine, you can't write it off as a business expense.

Lobbying expenses are another example of non-deductible expenses. This includes any costs related to influencing government decisions or policies.

Political contributions are also not deductible. This includes any donations you make to political parties or candidates.

Here are some specific non-deductible expenses to keep in mind:

Bad debts can be a tricky topic, but essentially, they're debts that have become worthless due to a debtor's inability or refusal to pay. To qualify for a bad-debt deduction, you must have a legal obligation for the debtor to pay you a specified sum of money, which is best established with a written document.

You can claim a bad-debt deduction if you loaned money to customers, suppliers, or employees who never paid you back. This type of debt must have a debtor-creditor relationship, which means there must be a written document stating the amount of the loan, interest rate, repayment schedule, etc.

To prove that the debt is uncollectible, you must have attempted to collect it. You can also claim a bad-debt deduction if someone doesn't pay you for work you performed or products you sold, but only if you use the accrual method of accounting.

Here are some examples of business bad debts:

If you've lent money to an employee or vendor without receiving it back, you can claim that back as a bad debt. The IRS defines bad debt as a loss from the worthlessness of a debt that was either created or acquired in a trade or business or closely related to your trade or business when it became partly to totally worthless.