If you own a business, you may benefit from tax-deductible expenses that will lower your tax liability. While some tax-deductible expenses are common and obvious, you may be unaware of others.
The Internal Revenue Service (IRS) defines tax-deductible business expenses as “ordinary, necessary, and reasonable” expenses needed to earn your business income. These expenses are subtracted from your business income before they’re subjected to taxation, in turn giving you a lower tax liability.
“Ordinary, necessary, and reasonable” expenses are any expenses that are considered helpful and appropriate for conducting business, according to Section 162 of the Internal Revenue Code. These may include:
Many of your expenses are considered current and may be deducted from the year they’re paid, while others are capitalized and need to be distributed over time. The law prohibits certain business expenses from deductions:
Proper business management includes efficiently and effectively managing tax liabilities, increasing deductions, and reducing tax obligations. Maximizing tax deductions can be a considerable benefit to a small business, since it lowers your taxable profit and gives you opportunities to enjoy certain business perks, such as a business trip or company car.
In order to gain all you can from your tax-deductible expenses, you must keep accurate records. Even allowable deductions may be denied if the expenditures don’t have adequate records.
General and administrative expenses include any expenses required to run a business, such as the following:
Education expenses could also be deductible, provided they are needed to improve the skills of someone in a position or are required by an employer. Education costs can’t be deducted if they were required for a promotion to a different position, however.
Miscellaneous expenses that could be deductible include contributions to charity, repairs and maintenance for business properties, bank fees and service charges, computer software, consultant fees, online services, and postage.
Typically, general and administrative expenses are deductible in the year they’re incurred, except for the expenses related to starting a business and getting it up and running. These expenses need to be capitalized over five years, although they’re deductible immediately after the business opens. If a business is expected to have a loss in the first few years, depreciating the costs of starting a business may be preferable.
If you have a home office as your business office, you may have significant tax deductions. These deductions allow those who meet specific criteria to deduct some of the rent or mortgage interest, depreciation of the workspace, home insurance expenses, utility bills, repairs, cleaning, and security expenses from federal income tax.
Those considering a deduction for a home office can do so through IRS Form 8829, which is filed with Schedule C. However, you must consider what restrictions you can claim on this form.
The deduction also considers the total size of the office as its percentage of the entire home or residence. Whatever that percentage is, this same percentage of the home’s utilities, real estate taxes, insurance, rent, mortgage interest, repairs and maintenance, and any other expenses related to maintaining the space may be deducted as business expenses.
If you need a vehicle to conduct business, the related expenses, other than the work commute, may be eligible for a tax deduction. All other mileage may be considered if the travel itself was for the sole purpose of conducting business.
The mileage deduction may be calculated through two different approaches. The cents-per-mile approach multiplies the cents-per-mile allowable by the IRS by the number of miles needed to conduct business.
Travel and entertainment expenses are deductible if they are directly related to conducting business or are associated with conducting business. Since they are also personal, only half of the expenses are deductible as related to the business.
Thorough records are required for any deductions, but they’re particularly important with travel and entertainment expenses. These records should have the amount, date, place, and reason, along with the client and type of the business discussed.
Parties that include all company personnel are entirely deductible, however, provided they’re not overly lavish. Gifts to customers or clients are also deductible to the maximum of $25 per year, or $400 if the company logo is placed on the gift.
Reasonable and necessary business travel, such as travel to meet with clients or to attend seminars and trade shows, are fully deductible as expenses. Airfare, train or bus fare, rental cars, taxi fare, meals, hotel rooms, and tips are deductible as well.
If you’re struggling with tax debt related to your business expenses, Solvable can help. We’ll place you in contact with experienced tax relief professionals who will review your situation and find the best solution to eliminate your tax debt and help you start fresh. Contact us today to learn more about our tax debt relief services.