Small Business Expenses for Taxes: A Comprehensive Guide

As a small business owner, you're likely no stranger to keeping track of expenses. According to the article, the average small business spends around 10% of its revenue on expenses, which can add up quickly.

You'll want to make sure you're deducting all eligible expenses on your tax return to minimize your tax liability. This includes things like home office expenses, which can be calculated using the simplified option of $5 per square foot of home office space.

Some expenses are more straightforward than others, like travel expenses, which can be deducted as long as they're related to your business. This includes things like gas, meals, and lodging.

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You can deduct up to $5,000 of business startup costs in your first year of business, which includes expenses incurred before your business officially opens, such as market research and advertising.

This deduction can be a huge help for cash-strapped startups, every dollar counts.

Just getting started? You can deduct up to $5,000 of business startup costs.

Related reading: Startup Capital for Small Business

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

Rent expense is also deductible if you rent a business location or equipment for your business. Keep in mind that rent paid on your home should not be deducted as a business expense, even if you have a home office.

Business expenses must be ordinary and necessary to be deductible. This means that lobbying expenses, political donations, traffic tickets, and commuting to and from the office are not tax deductible.

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As a small business owner, I've learned that office supplies and equipment are essential to keeping your operation running smoothly. You can fully deduct the cost of office supplies like paper, pens, and paper clips.

Computers and software are also considered office supplies and equipment, and you can deduct their cost in the year of purchase. This includes payroll software, which can be a huge help in managing your finances.

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Furniture, stationery, and postage are all part of this category as well. For smaller items, you can usually deduct the total cost in the year of purchase.

Larger purchases, however, may need to be depreciated over several years. This means you'll need to spread the cost out over time, rather than deducting it all at once.

Business insurance is a must-have in today's litigious society. It's a small consolation that premiums for various types of insurance are deductible.

General liability insurance, professional liability insurance, workers' compensation insurance, and commercial property insurance are all eligible for deductions. Even specialized insurance like cyber liability or business interruption insurance can be deducted.

The good news is that you can deduct 100% of health insurance premiums for yourself, your spouse, and your dependents. This is an "above-the-line" deduction that reduces your adjusted gross income.

Here are the types of insurance premiums that are deductible:

Bank fees can add up quickly, but they're fully deductible, including charges for business checking accounts and credit card processing fees.

Having separate bank accounts and credit cards for your business is a good idea, as it helps keep personal and business expenses separate.

You can deduct annual or monthly service charges, transfer fees, and overdraft fees charged by your bank or credit card company.

Merchant or transaction fees paid to a third-party payment processor, such as PayPal or Stripe, are also deductible.

Just remember, you can't deduct fees related to your personal bank accounts or credit cards.

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An ordinary expense is one that's normal and widespread in your industry. It's something that your business needs to function, and it's not considered extravagant or excessive.

In the eyes of the IRS, an ordinary expense is one that's commonly found in your line of work. This can include things like rent for a business space, equipment and supplies, and even travel expenses for business-related trips.

If you're wondering what's considered ordinary, think about what's typical for your industry. For example, if you're a retail business, it's ordinary to have to pay for inventory and shipping. But if you're a startup, it might not be ordinary to have a large team of employees just yet.

Here are some examples of ordinary expenses:

These are just a few examples, but the key is to think about what's necessary for your business to operate. If it's something that's common in your industry, it's likely to be considered an ordinary expense.

Tax deductions can be a bit tricky, but don't worry, I've got the lowdown. You can deduct up to $5,000 of business startup costs and up to $5,000 of organizational costs paid or incurred.

The home office tax deduction is also a thing, and the maximum deduction under the simplified option is $1,500. That's a nice little chunk of change. You can also deduct up to 20% of your qualified business income for the QBI tax deduction.

Business supplies are deductible too, and that includes things like paper, pens, paper clips, staples, postage, books, computers, business software, and cleaning products. You can deduct the cost of materials and supplies in the tax year you use them, or if you don't keep records, you can deduct the cost of incidental materials and supplies in the tax year you purchase them.

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Here are some examples of business supplies that qualify for a tax deduction:

Remember, supplies used directly or indirectly in manufacturing goods are part of the cost of goods sold. Don't forget to keep records, especially for things like vehicle mileage, which requires a log of miles traveled and receipts.

Lastly, make sure you're not overclaiming deductions. Claim only what's legitimate and meets the IRS qualifications. Don't claim 100% business purposes on your vehicle if you use it for personal purposes too.

Keeping detailed records is essential for small businesses, as the IRS requires them to maintain good records for tax purposes. You'll need to reference these records when filing your business taxes and claiming deductions and credits.

Use accounting software to keep track of everything in one place, including your income statement, receipts, bank and credit card statements, and payroll records. This will save you time and reduce errors.

Automating the reconciliation of your expenses is the best way to ensure you get every deduction available. You can use accounting software that links with your bank account for automatic importing, which ensures you don't miss any transactions and that your expenses are properly categorized.

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Software subscriptions are a must-have for many businesses, and the good news is that these monthly or annual fees are fully deductible.

You can deduct the costs of cloud-based accounting software, productivity tools, and industry-specific applications.

Just make sure they're used primarily for business purposes, as using them for personal reasons might not qualify for a deduction.

Keeping detailed records is crucial for your business. You'll need to reference your records when it's time to file your business taxes and claim deductions and credits.

The IRS requires businesses to keep good records, which include your income statement, receipts, bank and credit card statements, and payroll records. You can use accounting software to keep track of everything in one place.

Make it a habit to scan your receipts after every purchase and store the records on your computer or in the cloud for safekeeping. It's much easier to reference your expenses at tax time if you don't have to rifle through a shoebox full of receipts.

Automating the reconciliation of your expenses is the best way to ensure you get every deduction available. Using accounting software that links with your bank account for automatic importing ensures you don't miss any transactions and that your expenses are properly categorized.

Advertising and marketing expenses are fully deductible if they're ordinary and necessary to your business, and you can deduct up to $5,000 in startup costs in your first year of business.

You can deduct the cost of hiring someone to design a business logo, purchasing ad space in print or online media, and launching a new website. These expenses are 100% deductible.

Examples of deductible advertising and marketing costs include:

Keep in mind that you can't deduct amounts paid to influence legislation or sponsor political campaigns or events.

As a small business owner, you're likely eager to deduct employee and owner expenses from your taxes. Salaries and benefits paid to employees are generally deductible, including health insurance premiums, retirement plan contributions, education assistance, and life insurance coverage up to $50,000 per employee.

To qualify for these deductions, the employee must not be the sole proprietor, partner, or LLC member. The salary must also be reasonable, ordinary, and necessary, and the services must have been actually provided.

Here's a quick rundown of what's deductible:

Education and Training is a crucial investment for any business, and fortunately, the costs are deductible. This includes expenses like workshops and seminars, online courses, books, and subscriptions to professional publications.

These expenses should maintain or improve skills needed in your current business, so a complete career change is a different story. If you're looking to switch industries, you'll need to consider those costs as personal expenses.

Workshops and seminars can be a great way to learn new skills, and online courses offer flexibility and convenience. Books and professional publications can provide valuable insights and knowledge.

Here are some specific examples of deductible education and training expenses:

Employee compensation can be a significant expense for your business, but it's also a crucial part of running a successful company. You can claim the cost of employee wages and benefits, including salaries, commissions, bonuses, and paid time off.

To simplify the process, you can pay employees in just three steps with a reliable payroll service. This can help you stay organized and ensure you're meeting your tax obligations.

Wages, bonuses, and benefits paid to employees are generally deductible, which can help reduce your tax liability. This includes health insurance premiums, retirement plan contributions, education assistance, and life insurance coverage (up to $50,000 per employee).

However, it's essential to note that these deductions only apply to employees, not owners or partners. If you're an owner or partner, the rules for deducting your own salary and benefits are more complex and vary based on your business structure.

To qualify for tax-deductible employee compensation, the "employee" must not be the sole proprietor, a partner, or an LLC member. Additionally, the salary must be reasonable, ordinary, and necessary, and the services must have been actually provided.

Here's a summary of the types of employee compensation that are generally tax-deductible:

Health insurance premiums can be a significant expense for both employees and self-employed individuals. You can deduct 100% of health insurance premiums for yourself, your spouse, and your dependents if you're self-employed.

The IRS recognizes the importance of employee health insurance, allowing you to deduct health insurance premiums for your employees, including health insurance premiums, retirement plan contributions, education assistance, and life insurance coverage.

Health insurance premiums for yourself, your spouse, and dependents can be deducted on Schedule 1 attached to your Form 1040 if you're self-employed. However, if you're eligible to participate in a plan through your spouse's employer, the business can't deduct those premiums.

Here are some types of health insurance premiums that can be deducted:

Remember to keep records of your health insurance premiums in case of an IRS audit.

Contract labor can be a great way to get help in your business without having to hire full-time employees.

You can deduct the fees you pay to freelancers or independent contractors as a business expense.

Just remember that 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.

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You can claim a tax deduction for the business use of your vehicle, but only for the amount relating to your business expenses. Don't claim a business use of vehicle tax deduction on personal use, such as commuting home from work.

There are two ways to claim a business vehicle tax deduction: using the standard mileage rate or actual expenses. If you use the standard mileage rate, multiply your business miles driven by the IRS mileage rate, which is set annually. You'll need to keep detailed receipts for actual expenses, including gas, oil, maintenance and repairs, depreciation or lease payments, insurance, and registration fees.

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

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If you use a portion of your home exclusively for business, you may be able to deduct a portion of your housing expenses against business income.

To qualify for the home office deduction, you must regularly use your home office exclusively for conducting business activities. This means you can't use your kitchen table as a desk, for example.

The IRS offers two methods for calculating the home office deduction: the simplified method and the actual expense method.

The simplified method allows you to deduct $5 per square foot of home office space, up to 300 square feet.

You'll need to measure your home office space to determine the square footage, and ensure it's used regularly and exclusively for business.

To use the actual expense method, you'll need to track all actual expenses of maintaining your home, such as mortgage interest or rent, utilities, real estate taxes, and repairs.

You'll then multiply these expenses by the percentage of your home devoted to business use.

Here's a summary of the two methods:

To qualify for the home office deduction, you must also meet two requirements: regular and exclusive use, and principal place of business.

If you use your vehicle solely for business purposes, you can deduct the entire cost of operating the vehicle. The IRS offers two methods for deducting vehicle expenses: the standard mileage rate and the actual expense method.

To qualify for the standard mileage rate, you must keep a detailed log of your business miles, including the miles driven, time, and place, and business purpose of your trip. The standard mileage rate for 2024 is $0.67 per mile.

If you use your vehicle for both business and personal trips, you can only deduct the costs associated with business-related usage. In this case, you can use the actual expense method to track your business miles and calculate the business percentage of your costs.

You can deduct the business percentage of costs such as gas, oil, repairs, tires, insurance, registration fees, and lease payments. Keep in mind that you cannot switch from the actual expense method to the standard mileage method on the same vehicle.

Here are the steps to calculate your vehicle expenses using the actual expense method:

Staying on top of your deductions is crucial to minimize your tax liability. Many people struggle to remember important expenses like restaurant expenses incurred in January last year.

To keep track of business expenses, you can categorize them quickly and efficiently with a little organization and time. You'll need to keep accurate records and stay on top of your monthly bookkeeping.

Accurate records will help you catch deductions every month, giving you confidence that you've caught everything. This is especially important if you don't have a good DIY bookkeeping setup.

Consider using a service like Bench that will do your bookkeeping for you, catching deductions every month and sending your accountant their books at year end.