A Step-by-Step Guide on How to Report Business Expenses on Taxes

Reporting business expenses on taxes can be a daunting task, but with the right approach, you can navigate it with ease.

First, gather all your receipts and invoices from the year, as you'll need these to calculate your business expenses.

Keep in mind that the IRS allows businesses to deduct expenses that are ordinary and necessary, which means they're common and required for your business to operate.

Organize your expenses into categories, such as rent, utilities, and travel, to make it easier to find what you need when it's time to report.

To claim a deduction for an unreimbursed employee business expense, you'll need to file a PA Schedule UE, Allowable Employee Business Expenses form along with your PA-40 Personal Income Tax Return.

Review the instructions on Page 25 of the PA-40IN to determine if you can deduct expenses from your PA-taxable compensation.

To report lodging, meals, and entertainment expenses, keep in mind that these can only be claimed while traveling overnight. Meals cannot be claimed if you're working late.

You'll need to keep copies of receipts, information on the business purpose of the expense, and verification from your employer that the expense was required.

To claim entertainment expenses, the expense must be ordinary and necessary to the trade of business or profession, and directly related to the active conduct of business or immediately precede or follow the active conduct of business.

Here are the requirements for claiming lodging, meals, and entertainment expenses:

Personal tax deductions for business owners can be claimed on Schedule C or Form 1065’s Schedule K-1, but there are a few other tax breaks small business owners commonly claim on their individual returns.

You can deduct a wide range of expenses on your taxes as a business owner. One of the most common types of expenses is travel expenses, which include travel to and from your destination, parking and toll fees, and meals and lodging.

To qualify as a business expense, the expense must be ordinary and necessary for your business, and primarily for business purposes. For example, if you travel to a new client's office, you can deduct the cost of travel and meals.

Here are some other types of business expenses you can deduct:

These expenses can help reduce your taxable income and lower your tax bill.

Ordinary expenses are a crucial part of business expenses, but what exactly do they mean? According to the IRS, ordinary expenses are those that are normal and widespread in the industry. In other words, they're the everyday expenses that businesses incur to operate and stay afloat.

To qualify as an ordinary expense, the expense must be necessary for the business to function. This means that it's not just a nice-to-have, but a must-have. For example, if you're a restaurant owner, your ordinary expenses might include the cost of food, labor, and rent.

But what about expenses that are a bit more subjective? The IRS provides guidance on what constitutes an ordinary and necessary business expense in IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses. We follow these guidelines to ensure that our business expenses are legitimate and deductible.

Here are some examples of ordinary expenses:

These are just a few examples of ordinary expenses that businesses incur. By keeping track of these expenses and following the IRS guidelines, you can ensure that your business is taking advantage of all the deductions it's eligible for.

Contract labor can be a big help to your business, especially if you hire freelancers or independent contractors to get tasks done. You can deduct their fees as a business expense.

Just remember to keep track of how much you pay them, because if you pay a contractor $600 or more during the tax year, you're required to send them a Form 1099-NEC by January 31st of the following year.

Salaries and benefits are generally tax-deductible for businesses, but there are some criteria to meet.

The employee receiving the salary or benefits must not be the sole proprietor, a partner, or an LLC member. This means that if you're the owner of a business, you can't deduct your own salary as a business expense.

To qualify for a tax deduction, the salary must be reasonable, ordinary, and necessary. This means it should be a fair wage for the work being done and not excessive.

The services provided by the employee must have actually been performed. Simply paying someone a salary or providing benefits without any work being done won't qualify for a tax deduction.

Here are the key criteria to keep in mind:

Businesses record their expenses primarily through the income statement, which helps determine their taxes. Most businesses have three categories of expenses.

Direct costs are the most straightforward type of expense, directly related to the production or sale of a product or service. Indirect costs, on the other hand, are expenses that aren't directly related to production or sales, but are still necessary for the business to operate.

Interest is another type of expense that businesses need to consider, which can be a significant cost depending on the business's financial situation.

Joe, a self-employed writer, had $60,000 in self-employment income in 2024, but his bookkeeper found $6,000 in contractor expenses that reduced his taxable income to $54,000.

Locating these expenses saved Joe over $1,500 in taxes. This is a significant reduction, and it's essential to look for all available deductions to minimize tax liability.

Joe's experience highlights the importance of reviewing all business expenses, not just the ones you're aware of.

When it comes to claiming expenses for work attire and supplies, there are some specific requirements to keep in mind.

You'll need to provide receipts for each purchase, along with documentation explaining why the specific attire, tool, or supply is required by your employer.

A copy of your employer's work policy can be submitted in place of a letter from your employer. This can be a convenient option if you have access to your employer's policy documents.

To ensure you have all the necessary documentation, be sure to keep track of your receipts and any relevant policy documents.

Professional license fees and insurance costs can be a necessary expense for many small business owners. You may be required to supply photocopies of your license or policy, receipt from purchase, and documentation of why it is required by your employer.

A copy of your employer's work policy outlining these requirements can be submitted instead of a letter from your employer. This can be a convenient option for those who have the policy readily available.

Some business expenses may be tax deductible, including professional fees and insurance premiums. However, it's essential to consult with your tax advisor or CPA before claiming a deduction on your tax return.

Here's a list of some common professional fees and insurance costs that may be tax deductible:

Remember, some deductions may not be available to your small business, so it's crucial to review your specific situation with a tax professional.

If you use your car for business purposes, you can deduct the related expenses. You can use your car for business purposes if you're self-employed or if your employer reimburses you for business-related expenses.

If you use your car for both business and personal trips, only the costs related to its business use are deductible. This means keeping receipts and a careful log of mileage and other costs associated with the vehicle.

You can deduct the costs of operating the vehicle, including gas, oil, repairs, tires, insurance, registration fees, and lease payments, multiplied by the percentage of miles driven for business. The standard mileage rate for business miles driven in 2024 is $0.67 per mile.

You can choose between the standard mileage rate and the actual expense method to determine your business car expenses. The actual expense method requires tracking all costs of operating the vehicle for the year and multiplying those expenses by the percentage of miles driven for business.

You can keep a detailed log of your business miles, use an app to track your trips, or reconstruct a mileage log using other documents, such as calendars or appointment books. This will help you document the miles driven, time and place, and business purpose of your trip.

To substantiate your deduction, you'll need to keep good records of your business miles and expenses. This can include receipts, invoices, and bank statements.

Here are the two methods for deducting vehicle expenses:

Accommodations and Expenses are a crucial part of any business trip or relocation. To claim these expenses, you'll need to keep receipts and documentation.

You can only claim lodging, meals, and entertainment expenses while traveling overnight. Meals can't be claimed by taxpayers working late. Federal per diem rates are not allowable.

To support these expenses, keep copies of receipts, information on the business purpose of the expense, and verification from your employer that the expense was required.

If you're moving for your employer's convenience and pass the distance test, you can claim moving expenses. The distance test requires your new workplace to be at least 35 miles farther than the distance between your old residence and your old workplace.

Here's a summary of allowable moving expenses:

Remember to keep an itemized list and proof of each expense, including your previous home and work addresses and your current home and work addresses.

Client gifts are a thoughtful way to show appreciation for your clients, and you can deduct up to $25 per recipient.

If you're planning to give gifts, consider the deduction limit of $25 per recipient to stay within the allowed expense.

You can use this opportunity to build stronger relationships with your clients, and the tax deduction can be a nice bonus.

Having separate bank accounts and credit cards for your business is always a good idea. This separation helps keep your personal and business finances organized and makes it easier to track business expenses.

Bank fees, such as annual or monthly service charges, transfer fees, or overdraft fees, can be deducted. These fees are a legitimate business expense and can help reduce your taxable income.

You can also deduct merchant or transaction fees paid to a third-party payment processor, like PayPal or Stripe. These fees are a necessary cost of doing business and can be claimed as a deduction.

Don't forget, fees related to your personal bank accounts or credit cards are not deductible. Keep your personal and business finances separate to avoid any confusion or issues with the IRS.

Legal fees are a necessary expense for any business, and most of them are deductible.

Legal fees charged by lawyers, accountants, bookkeepers, tax preparers, and online bookkeeping services like Bench can be deducted.

If you pay for a service that includes both business and personal work, you can only deduct the part of the fee that's related to your business.

Rent Expense can be a significant business expense, but there are some important details to keep in mind.

Rent paid for a business location can be deducted as a business expense, which can help reduce your taxable income. This includes rent for equipment, such as a storage unit or a vehicle.

Rent paid on your home, even if you have a home office, should not be deducted as a business expense.

Telephone and internet expenses can be deductible business expenses if they're integral to your business.

You can't deduct the cost of your first landline at home, even if you use it solely for work.

However, if you have a second landline dedicated to your business, the cost of that line is deductible.

If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the percentage allocable to business use.

Keep a record of your itemized bills or other detailed records to prove the amount of business use in case your return is audited.

Tax deductions are an essential way to minimize the amount of tax you have to pay. You can deduct expenses that fit the IRS criteria from your taxable income.

Making the most of your tax deductions can save you hundreds or even thousands of dollars at tax time. For example, Joe, a self-employed writer, was able to save over $1,500 in taxes by locating $6,000 worth of contractor expenses.

To claim these deductions, you'll need to keep accurate records and stay on top of your monthly bookkeeping. This is especially important for small business owners, who may struggle to stay on top of their deductions year-round. Here are some common tax deductions for small businesses:

Remember, some of these deductions may not be available to your small business, so be sure to consult with your tax advisor or CPA before claiming a deduction on your tax return.

A tax deduction is an expense that you can subtract from your taxable income, essentially allowing you to pay a smaller tax bill. You can deduct various expenses related to running your business, such as state income taxes, payroll taxes, and business licenses.

You can also deduct expenses like depreciation, which is the cost of spreading out the costs of business assets over several years. The IRS gives business owners several ways to write off the full cost of these assets in one year, including the de minimis safe harbor election, Section 179 deduction, and bonus depreciation.

To qualify for a tax deduction, the expense must fit the IRS criteria. You'll need to keep detailed records of your expenses, including receipts and documentation, in case the IRS requests a breakdown of your expenses.

Some common tax deductions for self-employed businesses include state income taxes, payroll taxes, and business licenses. You can also deduct personal property taxes, real estate taxes, sales tax, excise taxes, and fuel taxes.

Here's a list of some common tax deductions:

Tax deductions can save you a significant amount of money on your tax bill. A tax deduction, also known as a tax write-off, is an expense that you can deduct from your taxable income.

You can deduct expenses related to running your business, such as advertising and promotion, business meals, and business use of your car. If you use a car entirely for business purposes, you can deduct the related expenses. However, if you use a car for both business and personal trips, only the costs related to its business use are deductible.

Keeping accurate records is crucial to claim these deductions. You'll need to keep receipts and a careful log of mileage and other costs associated with the vehicle. Ongoing bookkeeping is critical to help you tally up your deductions.

Here are some common tax deductions for small business owners:

You can also deduct various taxes and licenses related to your business, such as state income taxes, payroll taxes, and business licenses. However, you cannot deduct amounts paid to influence legislation (i.e., lobbying) or sponsor political campaigns or events.

The key to business tax reporting and business expense deductibility is that expenses are "ordinary and necessary." This means that the costs of doing business are deducted from income in order to arrive at taxable income for the period being reported.

Some expenses can be tricky to categorize as deductible or non-deductible. If you're unsure, consider this: any expense with a personal benefit rather than a business benefit is non-deductible.

For instance, if you attend a conference in Los Angeles and spend a day at Disneyland, the tickets to the park are not deductible.

As you navigate the world of business expenses, you may find that the rules differ depending on whether you're dealing with federal or state regulations. State and federal rules for allowable business expenses differ, with some instances allowing for more generous deductions.

In Pennsylvania, for example, you can deduct 100 percent of actual unreimbursed employee business expenses from your income for personal income tax purposes. This is because Pennsylvania doesn't have federal tax accounting limitations and thresholds.

To claim unreimbursed expenses in Pennsylvania, you'll need to meet certain conditions and provide supporting documentation. This includes reporting the actual amount paid, not estimated or guessed amounts, and ensuring the expenses are reasonable and necessary for your job.

Here are the conditions to keep in mind:

It's worth noting that you can't deduct expenses if you've been reimbursed by your employer, even if it's just partially. However, if your employer included reimbursements for your expenses in your PA taxable compensation on your W-2, you may be able to deduct your reimbursement allowance as an allowable PA business expense.

To support your claims, you may need to provide a detailed breakdown of all expenses claimed, dated receipts, and a letter from each employer.

If you own a retail store or a startup, you're in luck because there are specific deductions you can take advantage of to reduce your tax bill.

Our friends at Gusto have a handy list of store deductions and startup tax deductions that can help you save money.

If you're part of the over 140,000 fellow entrepreneurs who receive expert advice for their small business finances, you already know how crucial it is to keep track of these deductions.

Gusto's list is a great resource to have on hand, especially if you're just starting out and need to get your finances in order.

By taking advantage of these deductions, you can free up more money in your budget to invest in your business and watch it grow.

In Pennsylvania, there are specific rules for unreimbursed business expenses, particularly when it comes to mileage. You can't deduct expenses based on federal per-diem allowances unless you actually paid for them while performing your job duties.

Commuting expenses are not allowed for tax purposes in Pennsylvania, unless you're a tradesman and you're traveling to a job that's 35 miles or fewer from your union hall or personal residence.

For tradesmen, commuting costs include mileage to and from the job site, as long as it's within the 35-mile radius. This is a key exception to the general rule that commuting expenses aren't deductible.

If you received a fixed-mileage allowance or per-diem allowance from your employer, but it wasn't included in your compensation, you can't deduct the corresponding expenses. This is a common scenario, but it's essential to understand the rules to avoid any issues.

If your employer reimbursed you for your allowable expenses in the exact amount, you can't deduct them for tax purposes. This is a straightforward rule, but it's crucial to keep track of your expenses and reimbursement amounts to ensure you're following the correct procedure.

Some expenses are just not deductible, like bribes and kickbacks, or contributions made to political parties or candidates. These are clearly non-deductible.

Lobbying costs are also not deductible. If you're trying to influence government policy, that's not a business expense.

Expenses with a personal benefit rather than a business benefit are also non-deductible. This can be a gray area, but if you spend a day at Disneyland while on a business trip, those tickets aren't deductible.