Comprehensive List of Business Expenses and Tax Deductions
Question: “What expenses can I deduct for my business, and how do I need to categorize them?"
The answer is - it depends. Not very satisfying is it? Well, it depends on what your business is and what information is important to you.
Tracking your expenses serves two purposes
to give you support for taking deductions on your income tax return, and
to provide you with useful information to be able to run and manage your business.
You can create a system for tracking your expenses to satisfy both of these requirements. Depending on your business, you may have more or less categories than someone else.
As a general rule, in order for an expense to be deductible for tax purposes, it has to be “ordinary and necessary.” An “ordinary” expense is one that is commonly acceptable for your specific business. A “necessary” expense is one that is helpful and appropriate for your business. For example, if you run a coaching business, an ordinary and necessary expense may be the cost of scheduling software so your clients can set up appointments with you. It’s a common expense for people in your business and it helps you run your business more efficiently. On the other hand, if you go out and buy a lawn mower, that wouldn’t be ordinary and necessary for your coaching business, but if you were a landscaper it would be. Basically, if you can justify the business necessity of an expense without feeling like you really have to work to convince someone, then you’re probably OK. But if you’re unsure about something, always check with your tax professional because there are some wacky tax rules out there.
Now that we have an idea of the overall rules for business expenses, let’s get into some details of the most common categories and the types of expenses that you might have in each one.
Advertising/Marketing
Expenses associated with getting your name out to your customers and bringing in new business. Examples: ads in the local newspaper, Facebook ads, Google ads, flyers, signage, events or trade shows, free samples of your product, etc.
Auto expenses
There are two methods to choose from when deducting auto expenses, both methods require that you track your business miles driven. I recommend using an app like MileIQ to help you keep track of your business miles. The easiest and most common method is to use the standard mileage deduction allowed by the IRS for the total number of business miles driven in a year ($0.575/ mile in 2020 and $0.58/mile in 2019).
The second method is to deduct a percentage of your actual total auto expenses (gas, oil, repairs, depreciation, insurance, license and registration, etc.) based on the percentage of miles driven for business during the year. For example, if your total auto expenses for the year were $10,000 and 50% of your miles for the year were for business, you would deduct $5,000 in auto expenses. So if you pay and track all of your auto expenses through your business during the year, at year-end you’ll need to remove the personal portion of the expenses.
Bank services charges
Any fees charged on business bank accounts and credit cards. This would also include fees charged by your credit card processor for payments received from customers such as PayPal, Stripe, QB Payments, Square, etc.
Contract labor
The fees paid to independent contractors to perform services for your business. Examples: graphic designers, virtual assistants, social media managers, etc. Keep in mind that if you pay an independent contractor over $600 for services in the calendar year, you may be required to issue them a form 1099-Misc by January 31 of the following year. Make sure to get a Form W-9 from any contractors you pay so you have the necessary information to prepare 1099’s at year-end. To view my post about 1099’s – CLICK HERE.
Education and training
The cost of education and training related to your business or occupation. Under IRS regulations, the education must maintain or improve skills required in your present job or profession, it can’t be education expenses for a career change or to start a new business. So if you are a business coach you can deduct training classes to learn how to market your business, but you can’t deduct cooking classes to learn how to be a chef. Examples: online training courses, seminars, conferences, self-study courses, etc.
Dues and subscriptions
The cost of subscriptions to professional publications, newsletters or books. Also, dues paid to professional organizations such as your chamber of commerce, BNI, etc. You can’t deduct dues for private clubs such as social or athletic clubs.
Gifts
The costs of gifts to business associates are deductible up to $25 per person per year. If you give holiday gifts to your clients, you may be able to deduct at least part of the cost.
Insurance
The cost of business insurance policies. Examples: general liability, professional liability, errors & omissions, workers compensation, etc. Note: auto insurance falls under the auto expenses category discussed below.
Interest expense
Interest costs on business loans, this would also include interest on business credit card accounts. If you have a credit card that you use for business and personal, you would need to allocate the interest between business and personal. I highly recommend using a separate credit card just for business, it makes it easier to track your expenses and then you don’t have to worry about allocating interest costs.
Legal and professional services
Fees paid to professionals like lawyers, accountants and tax preparers.
Meals
This category can get tricky and there are very specific rules about when meals are deductible, and even when they are a business expense they are usually only 50% deductible. In order for meal expenses to be deductible it has to be directly related to your business. The documentation requirements are stricter for meals as well – you need to document the date, the amount, the place the meal took place, the business purpose of the meal, and the business relationship of the people involved. If you hold a party, you should maintain a guest list noting the business relationships.
There are a few circumstances when meals are 100% deductible, but they are not as common, for example if you provide meals as part of an office holiday party. (Note: the rules around meals changed with the passage of the new tax laws effective for 2018, the above reflects the new rules.)
Postage
The cost of postage for mailing business letters and packages.
Rent
Rent paid for office space used for your business. You could also have rental expense for machinery and equipment used in your business.
Repairs and maintenance
Expenses to repair and maintain business assets. Examples: computer repair, repairs to office space, maintenance costs for business equipment, etc.
Supplies
The cost of supplies used in your business. Examples: office supplies, small tools, business cards, etc.
Taxes and licenses
Business taxes and licenses paid for your business. Examples: property taxes on business property, license fees paid to the city and/or state, etc.
Travel
The cost of business related travel. Examples: airfare, hotel, car rental, cabs, bus fares, parking, tolls, etc. If you do a significant amount of travel you may want subcategories for the different expenses so you can get a better picture of your costs. Keep in mind you can’t deduct expenses related to commuting to and from your office, if you have an office outside the home. If you have a home office that is your primary office, then any business travel starts when you leave your home office.
Utilities
The cost of utilities for your office space. Examples: electricity, telephone, gas, water, internet, etc.
Wages
The cost of wages paid to employees. If your business is operating as either an S-Corp or a C-Corp, you can also deduct the wages paid to yourself for services provided to the business. You are required to pay yourself reasonable compensation based on the services you perform. If you are operating as a sole proprietor or LLC, you can’t pay yourself wages, instead any money pulled out of the business is treated as a distribution.
Payroll taxes
The employer portion of payroll taxes paid on employee wages. Examples: Medicare, Social Security, State Unemployment, etc.
Payroll processing fees
If you have employees and use an outside service to process payroll, which I highly recommend, you can deduct the cost of the service.
Employee benefits
The cost of fringe benefits provided for your employees. Examples: health insurance, life insurance, disability insurance, etc.
Website and internet-related costs
The costs associated with hosting and maintaining your website. Examples: domain name fees, hosting fees, e-mail services, cloud storage, etc. If you pay someone to build your website you may have to amortize these expenses over several years, so check with your tax preparer.
Other Considerations
Capital expenses
Some business expenditures are not fully deductible in the year they are incurred and are amortized (spread out) over multiple years. These are business assets, start-up costs and improvements and are typically major expenditures. You should discuss these types of expenditures with your tax preparer to make sure they are accounted for properly. Examples: new computer, furniture for your office, putting in new carpet in your office.
Business use of your home
If you use part of your home for your business, you may be able to deduct a portion of your home expenses including, mortgage interest, insurance, utilities, repairs and depreciation. In order to qualify to claim these expenses, you must meet two tests: 1) the business part of your home must be used exclusively and regularly for your business (i.e. your kitchen table doesn’t count) AND 2) it must be your principal place of business (you don’t have another office outside the home that is your main work place) OR it is a place where you meet or deal with clients/customers in the normal course of your business, OR it is a separate structure used for your business.
Disclaimer
The IRS tax code can be very complicated in certain areas, however most service based business have fairly straight forward expenses. The above list gives you a general guideline of the expenses you can deduct for your business, but is not intended to be all inclusive. I highly recommend consulting with a tax professional so that you can make sure you are tracking all of your business expenses properly so you can maximize your deductions at tax time.
Tracking Your Expenses
Now that you have a better idea of what expenses you can deduct for your business, you need to make sure you have a system for tracking them so you can minimize your tax liability. If you’re looking for a system to help you keep track of your expenses and need something more sophisticated than a spreadsheet, QuickBooks Online can help automate the tracking of your income and expenses.