Business Expense Deductions That Can Lower Your Tax Bill

List of Business Expense Categories

The IRS says a business expense must be ordinary, necessary and directly related to running a company to be deductible. Most small business expenses fall into specific categories. Schedule C, the IRS form which sole proprietors use to report their income, has a business expenses list with 20 broad categories that include:

•  Advertising
• Car and truck expenses
• Commissions and fees, contract labor
• Depletion
• Depreciation and section 179 expense deduction
• Employee benefit programs
• Insurance, interest
• Legal and professional services
• Office expense
• Pension and profit-sharing plans
• Rent or lease.
• Repairs and maintenance
• Supplies
• Taxes and licenses
• Travel and meals
• Utilities
• Wages

Categorizing expenses is an important part of keeping good business records. The IRS wants business expenses accounted for and reported in the correct categories so it can determine if the deductions are legitimate. Categorizing expenses correctly will also mean a smaller bill from your accountant at tax time.

General Business Operation Expenses

Some deductible business expenses are universal—all small business owners incur them. These expenses include wages and taxes. As companies grow, they’re likely to have more expenses and, in turn, deductions. The following are some common business expense examples.

• Utility Expenses for Small Business Owners: If a small business owns its premises, it pays for electricity, gas, water and trash collection. For renters, unless the landlord covers those charges, the business is responsible for paying them. In either case, these are just business expenses examples that might be deducted from your taxes.
• Rent or Mortgage Payments: Small businesses that rent might be able to deduct their monthly payments to the landlord. And those who own their premises might deduct mortgage interest. However, the principal on the mortgage is not deductible.
• Home Office Costs: People who run businesses out of their homes might be able to deduct some of the expenses for their houses or apartments. But to qualify for the deduction, home offices or businesses must meet IRS criteria. For example, the space where the business is conducted must be dedicated exclusively to business purposes. A corner of a playroom or any space doubles for personal use won’t qualify. And the home must be the principal place where business is conducted. IRS Publication 587
• Website and Software Expenses: The accounting software subscription you pay for each month or year and your website domain name registration could all be deductible expenses. The fees you pay to the service that hosts your website could also be a deduction.
• Business Licenses and Permits: In the case of a trade or business, especially those catering to consumers or doing construction work, owners must get federal, state and/or local licenses or permits. These can be expensive to obtain and renew and may include the costs of being trained and certified to qualify for a license. However, as long as the costs don’t exceed your profit for the year, they may be deductible.
• Bank Fees and Interest Payments: There are a variety of fees and expenses you might incur as a small business, and some are tax-deductible. Bank fees, interest on credit cards and loans, financing costs and depreciation are all part of the cost of doing business. As long as they don’t exceed your profit for the year, you may be able to deduct them. The Tax Cuts and Jobs Act (TCJA) of 2017 limits how much interest a business can deduct, but many small businesses whose revenue has averaged up to $25 million over three years may be able to deduct all their interest.
• Professional Fees and Business Services: You may be able to deduct business services expenses, including the money you pay your lawyer, accountant and consultant for advice about business decisions, taxes, complying with government regulations and other legal or financial matters. This tax-deductible expense does not apply to payments made to companies that provide ordinary and usual business-related services such as cleaning and administrative services.
• Entertainment Expenses: The costs of taking clients or customers to entertainment or sporting events are generally no longer deductible under the TCJA. While these expenses are, for the most part, not tax-deductible, they may still be worthwhile investments in goodwill. However, since you’ll likely not get reimbursed from the government, you’ll need to apply some business expense management and maybe buy seats on the balcony or upper deck.
• Business Meals and Travel Expense: Owners may be able to deduct costs for business meals—for example, taking a client out to dinner—but the IRS caps the deduction at 50% of the bill. That’s the case whether the restaurant is near your office, or the meal takes place during business travel. However, it’s important to note that with the Consolidated Appropriations Act (2021), food and beverages bought for business meals will be 100% deductible if purchased from a restaurant in 2021 and 2022. This deduction is temporary and will revert back in 2023. The government also puts a 50% limit on car, airfare and other transportation expenses.
• Equipment, Materials and Supplies: Any small business owner knows it takes equipment, materials and supplies to run their company. These are typically considered both fixed expenses and operating expenses. Some are deductible.
• Furniture, equipment and machinery deductions: small businesses that own furniture, equipment, tools, and machinery will make regular asset purchases over the years. They might also make one-time purchases like computers and monitors for the office or point-of-sale systems for cash registers and checkout systems. Typically, these types of purchases should be broken down into costs and listed as business assets, not expenses. NOTE – Owners should be aware that Congress has been known to approve special, or bonus, depreciation rules. Small businesses need to consider short-term and long-term needs and goals in deciding how to deduct equipment costs.

ADDITIONAL BUSINESS EXPENSES:

• Office Supply Expenses
• Marketing and Advertising: Many of the costs of marketing, advertising, and even networking to build a business could be deductible. But owners need to be sure that the purpose of getting together with people has business purposes.
• Membership Fees: The cost of membership, such as dues, initiation fees, assessments, might be deductible because these groups have business purposes. But social organization and country club dues are generally considered non-deductible.
• Business and Health Insurance Premiums: Business insurance premiums can be expensive, but they could be tax-deductible, which may help an owner decide to buy more comprehensive coverage to protect their company. And offering health insurance can help in recruiting and retaining staffers.
• Auto and Vehicle Expenses for Business: Owners might be able to deduct a portion of what they spend to lease and maintain the vehicles—cars, SUVs, pickup trucks—but they must keep accurate records of the amount of travel done for business purposes. The IRS gives two options for computing the deduction at tax time. One is its standard mileage rate, set annually. Alternatively, calculate the percentage of travel for business purposes, say, 50%; you can then deduct half of what you spend on:
  • Leasing
  • Insurance
  • Repairs
  • Fuel
  • Garage rent
• Health Insurance
• People Costs: Employers have a wide range of deductions for the costs of having a staff. Many are standard, like payroll and benefits expenses, but Congress occasionally creates temporary deductions and/or credits during economic crises such as the Great Recession or the COVID-19 pandemic.
• Payroll Taxes: Many taxes that business owners pay are deductions. Owners may have to pay local property taxes, and if they’re employers, payroll taxes. All are deductible. Owners should take care that all state and local taxes, including income tax, property taxes and excise taxes, are listed on their tax returns. The payroll taxes that employers must pay include Social Security and Medicare, and both are deductible business expenses.
• Employee benefits: Employers who offer health or life insurance and contributions to retirement plans to staffers may be able to get a deduction for these expenses, in most cases. Those who offer adoption assistance payments or dependent care benefits might also get deductions.
• Training and education: Employers who require or recommend education or training for staff can deduct the cost of classes under certain circumstances. The business must have an employee education or educational assistance plan in place. It must aim to improve staffers’ job skills and experience, and the employee must be working in the field of study during the training. So, having a staffer take courses to upgrade their computer skills may be deductible, but sending a marketing department staffer to law school probably isn’t.

What Expenses Aren’t Deductible for a Small Business?

While the IRS permits a wide range of business deductions, there are many exceptions and prohibitions. These can change with the passage in Congress of new tax laws. Before an owner takes a deduction for any expense, they should consult the IRS website and talk with a tax professional.