What Type of Business Expenses Can Be Written Off?
There are many costs that are incurred when operating a business. From your phone bill to printer ink, there are multiple items that you need to monitor. Common expenses include advertising, marketing, utilities, office space, payments to employees as well as vendors, software, and equipment to run your company. If you are engaged in a for-profit business, you can deduct many of these types of items from your taxable income.
The question you may have is what expenses can translate into tax write-offs. As long as the expense is considered “ordinary and necessary” meaning it is common in your industry and essential for your company, you can deduct the expense.
To do so, you will simply subtract the amount of the expense from your business’s gross income to decrease your profit, and therefore your tax liability.
There will be times when a payment must be allocated between business and personal. An example of this could be if you are using your home as your office as well. If this is the case, you could claim a home office deduction.
To qualify, the IRS states that it must be your principal place of business and that you use the area of your home specifically for business purposes. This means if you work sometimes outside of the home and have a separate office then you wouldn’t qualify for the home office deduction.
Similar to the home office deduction, you may be able to deduct expenses for driving if you use your personal vehicle for business. To do so, track your miles and deduct the allowed amount based on the IRS’s standard mileage rate. Another option is to determine the business percentage of use and calculate your vehicle operating expenses, including maintenance, fuel, repairs and insurance costs. If you choose this option, make sure you keep detailed records or determine the ratio of car use that goes towards your business.
Another office and personal expense that could overlap is your cell phone. For example, if you use your phone for business 55% of the time then that means 55% of your bill can be deducted.
Startup costs can also be deducted, however, a portion of them may need to be amortized for a few years. There are some purchases such as a company vehicle, that should be treated as capital expenditures and depreciated over time.
According to the IRS, if your startup expenses are $60,000 or less, you are allowed to deduct up to $10,000 in business startup costs as well as $5,000 in organizational costs if those are less than $50,000. The remaining amount will be deducted on future year’s tax returns.
Although you may write off many business expenses, there are some you may incur that you can’t use to reduce your tax burden. Common examples include political costs, penalties or fines, clothing that’s not a required uniform, entertainment costs, and lobbying.
For easier tracking of your payments, it is recommended to keep personal and business funds separated. This is especially true for those set up as entities such as an S-Corporation or LLC.
