“I can deduct that?” Small entrepreneurs come to me with their business expenses and deductions, and I always ask: What about this? And this? And that? Deer-in-the-headlights. And then I assign the homework of going back and finding all ‘those’ expenses. I even had homework pads made because I give so much homework.
So, let’s break down ALL the things that are business expenses and deductions. Because no one likes homework.
What is a Business Expense? What am I Deducting?
Business expenses are anything “ordinary and necessary” that it costs you to operate your business. This could be everything from a portion of your phone bill to building a factory. Whatever it cost you to make the money is a business expense. Your total amount received minus all your expenses is called your profit, and making a profit is the goal of being in business.
But taxes and accounting are never that simple. Different things are expensed in different ways. Not all expenses are created equally. Some things are ‘inventoried’ or ‘depreciated’ or ‘liabilities’. I will break that down, too. Let’s start with the easiest ones.
Administration
This is expenses that are for operations that do not add anything to your product or service. Taxes, accounting, office supplies, bank fees, and other ‘cost of doing business’ stuff.
Promotion
I have so many people forget this part. This is the fees for your web domain name, your website hosting fees, all your advertising (social media ads), your business cards, your logo design, client gifts like printed pens and magnets, banners, signs, everything. Anything you do to promote your brand or sell your product or service is a deductible expense.
Your Team Expenses are Deductible
Anything you pay to people to help you is a business expense. This could be renting their equipment or paying for their labor. Any payroll to others through payroll or cash payments is a deduction.
If you are paying cash for labor, you are required to send each person (not corporations) a form 1099-NEC at the end of the year if you pay them $600 or more during the year. See my blog on 1099s here. You can still deduct labor for people paid under $600.
Do NOT deduct payments to yourself or for your personal expenses. You need to check with your tax professional to see how your business is formed and what tax form you use before you can expense any payments for your own services.
Sustainment, Communication, and Occupancy
Sustainment the things that keep your business ticking along day-to-day. Insurance, association dues, required continuing education, licensing, loan interest, software fees, networking and marketing are a few things that are ordinary and necessary to keep your business going.
Communication is things like your monthly internet access, your phone bill, and any fees for virtual meetings or remote login services. If you deal with the government like I do, you might also pay for a fax service.
Occupancy is your office space. Rent, utilities, repairs, maintenance, and property tax are the major ones. If you are buying your building, your mortgage interest is also included.
If you work at home, see my blog on the home office deduction here.
Travel
Business travel is deductible. Personal travel is not. You need to be ale to show which is which. If you travel for business, you need to keep a log of your business purpose. If you go to a one-day convention in Las Vegas, why did you stay for a week? You can only deduct the days you had a business purpose for being there.
On the days you had a business purpose, you can deduct your travel to and from, hotel, taxi, bus, car rental and associated expenses, and tips.
If you drive your car for your business, you can deduct the expenses associated with the business use of your vehicle. This is usually through mileage and explained in my blog post about car expenses here.
Meals can be Business Expenses
Meeting over lunch or a drink is considered “ordinary and necessary” by the IRS if it is for a business purpose. This is meals with clients or potential clients (trying to make a sale) or meals with colleagues (networking or discussing changes to the industry, trying to improve your business).
Meals while traveling out-of-town are also deductible. ‘Out-of-town’ for IRS purposes means that you were more than 50 miles away from home for at least 8 hours.
Most meals are only 50% deductible. Only half of the cost (including tax and tip) is deductible.
Job Supplies, Inventory, and Assets
This is the nitty-gritty, the nuts and bolts, the basics. This is what you need to do your job. If you are providing services, this is all your job costs. Cleaning products, saw blades, rope, safety glasses, subscription software, PPE, tarps, backdrops, printers, everything EXCEPT inventory and large assets.
Inventory: If you are selling products, whether you are selling food or artwork or hair products, what you buy to be resold is INVENTORY. This is also the same things you can buy without paying sales tax. Inventory is not deducted at the time of purchase, but when it is sold. Why? Because you only expense things that are used up in the course of your work.
Inventory methods are complex because you cannot track the exact cost of every single sandwich you sell. Talk to your tax professional about how to track your inventory.
Large Assets: If you make large purchases that will last several years (like a backhoe or a MacBook or a smoker) you need to deduct the cost over several years. The IRS has at least 5 methods to choose from and you can pick which one serves you best for each and every major purchase you make. This is best done with the help of a tax professional. If you buy any job supplies, or any other item above, and it cost over $500 per item, you should keep a separate list for tax time.
Not Business Expenses, but possible benefits elsewhere
Things that are NOT business expenses:
Start-up costs and education for a new venture – These are deducted under specific rules, check with your tax professional.
Charitable giving – This is usually deducted on your personal taxes.
Credit card and loan payments – see my blog post on credit card deductions here
Sales tax collected and paid – Sales tax is not part of the sale. It is never ‘your money’, it is a debt to the state, and should be recorded as a liability.
Fines and penalties – these are never deductible.
What you pay yourself – unless you are specifically set up to pay yourself payroll, personal expenses or pay for your labor is never a deduction.
Click here for the ultimate business deductions checklist from Grass Roots Taxes and avoid getting homework.
If you like reading IRS material, check out Publication 535 or this IRS blog post for more information on business expenses and deductions.
