The Federal income tax code allows businesses to claim several expenses as deductions. If a business uses spurious write-offs, it can be penalized with back taxes, penalties and interest fees. On the other hand, qualified business expenses can help sole proprietors to considerably reduce their tax liability. For a business expense to be deductible, it must be both ordinary for the business type and necessary. As an example, a dog groomer cannot deduct the cost of a barber’s chair, since that is not an ordinary or necessary expense for that kind of business.
The following categories describe the most commonly used business expenses and their basic requirements. For more information about any of these expenses and the guidelines for deducting them, see the Internal Revenue Service Publication 334: Tax Guide for Small Business.
Car and Truck Business Expenses
For auto expenses, business owners have the option of using either the Actual Expenses or the Standard Mileage Rate. Actual car and truck expenses that can be deducted include: depreciation, garage rent, gas, insurance, lease payments, licenses, oil, parking fees, registration, repairs, tires and tolls. Any taxpayer who wants to claim actual car and truck expenses will need to keep detailed records and receipts to back up their claims.
For depreciable property, a taxpayer can make use of a special provision called Section 179 depreciation, which allows a set amount of an asset to be depreciated more in the first year to offset tax liability. For more information about what assets qualify to be depreciated and possible depreciation methods, see the IRS Publication 946: How to Depreciate Property.
For those who don’t want to keep up with many records, the Standard Mileage Rate may be a more convenient choice. The Standard Mileage Rate is a flat amount that can be deducted per mile driven for business purposes and is adjusted yearly to account for actual expenses such as gas, repairs, insurance and depreciation. If a taxpayer chooses to use the Standard Mileage Rate, the only other auto expenses that can be deducted are parking fees and tolls. To claim this deduction, taxpayers must keep up with their business auto mileage during the year.
For taxpayers who qualify, it is always a good idea to keep receipts for the year and figure their tax deduction using both methods. They will then be free to use the method that is most beneficial for their situation.
Office Supplies and Business Equipment Expenses
Basic office supplies that are ordinary to the business and necessary for its operation can be deducted. Equipment used regularly and exclusively for business can also be deducted. Some equipment may qualify to be depreciated using the Section 179 method. Other equipment will have to be depreciated using the MACRS method. For more information, see IRS Publication 946: How to Depreciate Property.
Travel, Meals, and Entertainment Expenses
Travel that is necessary for business and will require more time than a normal workday can be deducted as a business expense. The cost of transportation, including airfare, car rental and cabs, along with hotel and lodging expenses may be deducted. Up to 50% of meal expenses incurred during necessary business travel may also be deducted. Expenses from entertaining a customer, client or employee may also be deducted up to 50% and are subject to certain conditions. For more information, see IRS Publication 463: Travel, Entertainment, Gift & Car Expenses.
Employee Business Expenses
Wages in the form of cash, property or services paid to employees are deductible. Other employee expenses are also deductible, including: pension contributions, benefit programs (such as health care plan contributions), awards, bonuses, education expenses, reimbursed employee expenses, sick and vacation pay, as well as certain fringe benefits. A business owner may not deduct the cost of his or her own salary or personal withdrawals from the business.
Expenses for the Business Use of a Home
Expenses incurred in the use of a home office that is regularly and exclusively used for business may be deductible. Business owners will need to calculate the square footage of the home used for business and then divide that into the total square footage of the home to calculate the percentage of regular home expenses that can be deducted. If a business qualifies, the percentage of the home’s mortgage, utilities and insurance that is used for the home office may be deducted. For more information, see the IRS Publication 587: Business Use of Home.
Other Business Expenses
There are many other business expenses that may be deducted including: advertising, insurance (such as property or workers’ compensation), taxes and licenses, legal and professional fees, repairs and maintenance, rent and utilities. To learn more about the qualifications for deducting these expenses, see Publication 334.
Disallowed Business Expenses
There are a few expenses that are expressly disallowed for businesses to deduct. They include: charitable contributions, political contributions, repairs to property that will add value to the property or extend its useful life, and demolition expenses or losses.
For small businesses and self-employed persons, understanding more about qualified business expenses is a great help. It can assist them to make adjustments that can increase their tax refund. It can also protect them in case they are randomly audited. However, the description of business expenses and qualifications given above is by no means comprehensive. To gain a complete understanding of how to claim qualified business expenses, contact a tax professional. To view the above listed tax publications, visit the Internal Revenue Service website.
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