10 Tax Deductible Small Business Expenses
Small business owners can generally deduct certain expenses on their taxes. But which ones? Here’s a quick look at what’s deductible and what isn’t, according to the Internal Revenue Service (IRS).
These Items Are Typically Tax Deductible:
- Employees’ pay
- Retirement plans
- Business rent
- Business meals
- Business travel
- Business use of your car
- Business use of your home
These Items Are Typically NOT Tax Deductible:
- Personal, living or family expenses
- Business startup costs
- Business assets
- Business improvements
In order to be deductible, a business expense must be both ordinary and necessary, says the IRS. Ordinary expenses are those that are common and accepted in your trade or business, like retirement plans. A necessary expense is one that is helpful and appropriate for your trade or business, but does not have to be indispensable to be considered necessary, like business meals.
According to the IRS, these business expenses are tax deductible:
You can generally deduct the pay you give your employees for the services they perform for your business.
These savings plans provide tax advantages to set aside money for your own and your employees’ retirement.
Typically, you can deduct rent as an expense if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Business interest is the amount charged for the use of money you borrowed for business activities.
Generally, you can deduct particular federal, state, local and foreign taxes directly attributed to your business.
Typically, you can deduct the cost of business insurance as a business expense, if it is for your trade, business or profession.
You can typically deduct the cost of meals if it is business-related entertainment.
You can generally deduct ordinary and necessary travel expenses away from home on business. The type of expense you can deduct depends on the specifics of your circumstances.
Business Use of Your Car
You can typically deduct actual expenses or the standard mileage rates as defined by the IRS, as well as business-related tolls and parking, for use of your car when traveling away from home on business. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Business Use of Your Home
You may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. Those expenses can include mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation or property insurance.
Even then, the deductible amount of these types of expenses may be limited. For more detailed information on what qualifies your home to be considered as a business expenses, visit the IRS page about the business use of your home, or tax to your tax adviser
Small Business Expenses That Are Not Deductible
Money spent on personal, living or family expenses is typically not deductible. However, if you have an expense for something that is used partly for business and partly for personal purposes, you can divide the total cost between the business and personal parts, and deduct the business part, says the IRS.
The IRS says small business owners may need to capitalize some business costs (meaning, recording them as long-term assets) rather than deduct them. What should be capitalized? Typically, those expenses considered assets in your business. These types of costs include:
- Business startup costs: These generally include costs paid or incurred that are directly related to the activity of creating a business, like the purchasing of equipment needed to create the product or service.
- Business assets: Typically, these include tangible equipment, items, buildings or property used in the operation of a business.
- Business improvements: Some additions, improvements and repair costs associated with tangible property may not qualify as tax deductible. Visit the IRS page on Costs You Can Deduct or Capitalize for more information, or met with your tax adviser.
It can be tough to figure out how to properly identify and categorize business tax deductions. When in doubt, hire a professional — a certified public accountant or a tax agent. These folks typically stay on top of changes in tax laws and can help make sure you’re filing correctly.
When it comes to managing your business expenses, it pays to help stay ahead of the game.
“Please note that Allstate Life Insurance Company or its agents and representatives cannot give legal or tax advice. The brief discussion of taxes on this page may not be complete or current. The laws and regulations are complex and subject to change. For complete details consult your attorney or tax advisor.”
Originally published October 2013.