In the course of running your business, you inevitably incur expenses. Do you know that some business expenses are tax-deductible while some are not and others are only partially deductible? What are deductible expenses? Let’s take a closer look at an explanation and examples of expenses that you can deduct from organization’s income and those that you should not try to claim when filing your taxes.
Business expenses that qualify for a tax deduction will reduce the company’s taxable income and the amount of tax it needs to pay. For business expenses to be tax-deductible, they must meet all the following conditions. Expenses must be:
- wholly and exclusively incurred in the making of income, so private expenses are not allowed for tax deductions;
- revenue in nature (e.g. normal everyday operating expenses);
- incurred and cannot be an estimated amount or a contingent liability;
- reasonable in amount;
- allowed under the income tax laws.
When the deductions can be claimed will depend on whether you use cash or accrual method of accounting. The tax deductions can be claimed during the year the expenses were paid if you adhere to the cash method. For the accrual method, the deductible expenses can be claimed when an expense occurs regardless of when payment is received or made.
Keep in mind that you might also be required to prove these expenses. Thus, you should keep track of your receipts and keep them in a safe place. It is also recommended to physically scan them or use an app on your mobile device and store them on cloud services. In many cases it is hard to tell what the receipt was for, so make notes for future reference.
Generally, any expense you might see in business records that is ordinary and necessary for your organization can be deducted. For example, you might be able to deduct education and training expenses for you and/or your employees if it is either legally required for your trade or your business, or if there is some regulation that requires you to have it, or this expense is necessary for you to maintain your license or continue in your profession.
For instance, in most states lawyers have continuing legal education requirements in order to keep their legal licenses and the ability to practice law. So, expenses that are related to meeting these requirements will be deductible expenses. You might also need to purchase books or journals to reference information for your business. These expenses might also be deductible for your business.
Many businesses also have salary expenses. These salaries can be tax deductible if they meet the conditions specified above and were paid for or incurred in the current year. Here is a list of common tax-deductible expenses that you can include on your tax form:
- Building and equipment maintenance and repairs
- Amortization and depreciation
- Bad debts that you cannot collect from your clients
- Accounting fees (Certified Public Accountant preparation and services)
- Consulting fees
- Legal, and license fees
- Banking fees on your business account
- Business association membership dues, such as Chamber of Commerce
- Commissions to outside parties
- Franchise fees
- Charitable deductions made for a business purpose
- Charity or traveling to perform charitable services
- Marketing and advertising, such as ads, Instagram boosts, and business cards
- Office supplies and expenses
- Computers and tech supplies, such as printers, a fax machine, label makers, and scanners
- Cleaning/janitorial services
- Home office (percentage of home utilities and other expenses dedicated for business use)
- Contractors and freelancers
- Car expenses, such as fuel, mileage, and maintenance
- Education and training for yourself and your employees to maintain licensing and improve skills.
Business owners should remember that based on the type of business you have, some restrictions might apply and allowed deductible expense will also vary. Thus, it is important to double-check with the tax professional if you are not sure about a particular expense. The rule of thumb is that if that expense helps you create an income, then you will be able to claim it.
Non Tax Deductible Expenses
Owners of businesses often try to claim some expenses as deductible when they aren’t actually tax-deductible. Expenses that are typically not deductible for a business are for example:
- Penalties and fines
- Political in nature contributions
- Burial, funeral, and cemetery expenses
- Legal expenses for defending criminal charges against an individual
- Private car expenses
- and so on.
Business owners often get creative to show how a particular expense helped them generate income. However, expenses that are deductible are usually not part of your daily life. For example, you cannot say that the jacket you are wearing is helping you do your business because you have to go meet your client in a suit. Thus, entrepreneurs and business owners should be honest with themselves and try to sound convincing enough when coming up with a list of deductible expenses.