What’re Deductible Business Expenses?

by  posted on:Jul 14, 2012 ,updated on:Dec 21, 2012 | views:1693 //Code for only logged in users

Every small business owner wants to know how to legally minimize his or her tax obligations. You know that the tax code allows you to deduct costs of doing business from your gross income. You are taxed on your net business profit. How to maximize your deductible business expense to lower your taxable profit then?

What are deductible business expenses? You would think the IRS has a list, but the Internal Revenue Code provides little detail other than “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. The tax code does not define either “ordinary” or “necessary”. The federal courts have tried to figure out what Congress intended and apply it to a particular set of facts. “ordinary” has been held by courts to mean “normal, common and accepted under the circumstances by the business community.” “Necessary” means “appropriate and helpful” to your business. The law specifically mentions salaries and other compensation for personal services, traveling expenses, rent, interest, taxes, pension and profit-sharing expenses and some other expenses. The IRS Regulations, court cases and other rulings provide guidance additional guidance. The list below is general in nature but should provide a starting point.

Please keep in mind that only expenses related to your business are deductible. For example, if you buy a computer and use it 75% for business and 25% for personal use, you can depreciate only the 75% used for business. Thus, for any of the items listed below, only the business portion is deductible. In order to secure a deduction you need not only an expense that qualifies as deductible, you also need have adequate documentation to support the expense. That generally means proving the expenditure was incurred (typically with an invoice) and proving it was paid (canceled check, receipt, etc.).

Here’s our list. It’s far from all inclusive and some of the items are subject to special rules. We’ve included comments on certain items. While intended for taxpayers filing a Schedule C, the rules generally apply to all businesses.

  • Accounting fees
  • Advertising Include flyers, direct mail, yellow book, Internet ads, journals (such ash high school yearbooks), sports sponsoring, events.
  • Amortization Some costs such as start-up expenses, organization costs, etc. may be partially deductible up front; excess amounts can’t be deducted but must be capitalized and amortized over a number of years.
  • Auto Actual expenses or standard mileage.
  • Bank charges
  • Charitable contributions Special rules apply to regular corporations; contributions by S corporations, partnerships, and sole proprietorships are deductible by the shareholders/partners/owners.
  • Cleaning (Office, shop, etc.)
  • Cost of goods sold
  • Commissions
  • Consultants
  • Credit and collection charges
  • Delivery
  • Depreciation
  • Dues and subscriptions
  • Education Courses to maintain and improve skills, courses to maintain license, but can’t also take education credit.
  • Employee benefit programs Health insurance, education expenses, etc.
  • Entertainment Generally only 50% is deductible; only business related; strict substantiation rules apply, get IRS Publication 463.
  • Equipment rent
  • Freight in
  • Home office Special rules apply.
  • Insurance Business, etc., but not health. Include liability, business owners, auto (company owned vehicle), workers’ compensation, etc.
  • Interest
  • Internet service Web connection and web hosting, business portion only.
  • Laundry Uniforms used in business.
  • Legal Some legal expenses, such as those associated with asset purchases, can’t be deducted directly.
  • Licenses
  • Meals Special rules apply. Generally only 50% is deductible.
  • Office supplies
  • Office expense Outside costs such as temporary help, secretarial services, etc.
  • Pension and profit sharing
  • Postage
  • Printing
  • Repairs Expenses that keep equipment in repair, not prolong its life.
  • Salaries and wages Show gross, before deduction for withholding taxes.
  • Security
  • Seminars
  • Small tools And those with life of less than a year. Others must be capitalized.
  • Software See the comment for small tools.
  • Supplies
  • Taxes Federal and state unemployment taxes, real estate for owned property, personal property and employer’s portion of FICA.
  • Telephone Including cell phone
  • Travel
  • Utilities Electric, gas, water, sewer, etc.

There are some expenses that aren’t deductible, but must be capitalized and depreciated:

  • Equipment
  • Furniture
  • Computers
  • Buildings and similar improvements
  • Repairs that extend the life of the property (Considered new property)
  • Land And many costs associated with land; land improvements generally have 15-year life.

You may be able to write off some of these expenditures (e.g., equipment, but not buildings) if you make an election under Section 179 to do so. For 2011 100% bonus depreciation may be available; for 2012 50% bonus available.

Some expenses must be capitalized and amortized. They include:

  • Start-up expenditures (up to $5,000 can be expensed; limits and rules apply)
  • Organization costs (up to $5,000 can be expensed; limits and rules apply)
  • Business licenses with a life of more than a year;
  • Acquisition costs of goodwill, customer lists, etc.

Some expenditures can’t be deducted:

  • Penalties and fines Traffic tickets, fines for business activities, tax penalty paid to the IRS.
  • Illegal bribes and kickbacks.
  • expenses for lobbying and social club dues.

The rules can often be complicated. The best approach is to record all your expenses in detail and discuss them with your accountant or tax advisor.