Understanding what qualifies as a business expense is essential for entrepreneurs and small business owners looking to maximize their tax deductions and keep more of their hard-earned money. This guide outlines common deductible small business expenses and also covers what is NOT a deductible expense. As always, if you’re a client of Waldman Accounting, feel free to send an email and ask. We’re always here to help.
To qualify as deductible expenses, they must meet the following criteria:
- Ordinary: Common and accepted in your trade or business.
- Necessary: Helpful and appropriate for your business operations.
Common Deductible Small Business Expenses
1. Home Office Expenses
Track home office expenses separately, and do not include in your Profit and Loss Statement. If you use a portion of your home exclusively and regularly for business, you can deduct expenses like:
- Rent or mortgage interest
- Utilities (electricity, internet, water)
- Property taxes
- Home insurance
- Maintenance and repairs (for the office space)
Pro Tip: Calculate the deduction based on the percentage of your home used for business.
2. Business Supplies and Equipment
Items needed to perform your work, such as:
- Computers, software, and peripherals
- Office supplies (paper, pens, staplers)
- Tools and equipment specific to your trade or profession
3. Travel and Meals
- Travel: Costs associated with business trips, including airfare, lodging, taxis, and rental cars.
- Meals: 50% of meals while traveling for work or entertaining clients.
Pro Tip: Keep detailed records of who was present and the business purpose of the meal.
4. Vehicle Expenses
Keep this separate from your Profit and loss if the vehicle is used for both Personal and business purposes.
If you use your vehicle for business, you must choose one of the following:
- Standard Mileage Rate: A set rate per mile driven for business.
- Actual Expenses: Costs like gas, maintenance, insurance, and depreciation, prorated for business use.
Pro Tip: Keep a mileage log to track business vs. personal use.
5. Professional Services
Fees paid to professionals like accountants, lawyers, and consultants.
6. Advertising and Marketing
Business cards, websites, online ads, and social media promotions.
7. Insurance
Business liability insurance or other policies directly related to your work.
8. Continuing Education
Courses, certifications, or seminars that enhance your skills in your current trade or profession.
9. Health Insurance Premiums
Self-employed individuals can deduct health insurance premiums for themselves, their spouse, and dependents.
10. Subscriptions and Memberships
Trade publications, professional associations, or industry-specific memberships.
11. Phone and Internet
The portion of your phone and internet bills used for business purposes.
Tips for Tracking and Documenting Business Expenses
- Keep Detailed Records: Maintain receipts, invoices, and documentation for every expense.
- Use Accounting Software: Tools like QuickBooks or Wave can help track and categorize expenses.
- Separate Business and Personal Finances: Use a dedicated bank account and credit card for business transactions.
- Work with a Tax Professional: Regularly consult with a CPA, EA, Knowledgeable Tax preparer or tax advisor to ensure compliance and maximize deductions.
Expenses That are NOT Deductible on Your Taxes
1. Personal Expenses
Expenses that are solely for personal use (e.g., personal groceries, clothing not specific to your profession, family vacations).
2. Commuting Costs
Driving between your home and a regular place of business (not considered business travel).
3. Fines and Penalties
Parking tickets or fines for breaking the law.
4. Political Contributions
Donations to political campaigns or lobbying efforts.
5. Overly Extravagant Purchases
Lavish or unnecessary items may be disallowed if not aligned with the “ordinary and necessary” rule.
By keeping these principles in mind and maintaining thorough records, you can confidently identify eligible expenses while avoiding common pitfalls.