How to Claim Tax-Deductible Business Expenses in 2019
Many business expenses can be deducted dollar for dollar
Self-employed individuals incur many common expenses in the course of earning income, but the Internal Revenue Service allows you to deduct many of these costs. In many cases, they're fully deductible. You can subtract a dollar from your taxable business income for each and every dollar you spend on expenses that are "ordinary and necessary" in your trade or business.
Other expenses can't be deducted dollar for dollar, but you can still get a tax break for paying them.
Fully Deductible Business Expenses
"Ordinary" means that most other self-employed taxpayers who work in your same business or trade also commonly pay for these things. "Necessary" means that they assist you in doing business and, in fact, you might not be able to do business if you didn't make these expenditures. The most common fully deductible business expenses include:
- Accounting fees
- Bank charges
- Commissions and sales expenses
- Consultation expenses
- Continuing professional education expenses
- Contract labor costs
- Credit and collection fees
- Delivery charges
- Dues and subscriptions
- Employee benefit programs
- Equipment rentals
- Factory expenses
- Interest paid
- Internet subscriptions, domain names, and hosting
- Legal fees
- Maintenance and repairs
- Office expenses and supplies
- Pension and profit-sharing plans
- Printing and copying expenses
- Professional development and training fees
- Professional fees
- Salaries, wages, and other compensation
- Small tools and equipment
- Trade discounts
Gifts to Customers or Clients
Not all of your expenses are fully deductible, even if they're ordinary and necessary. You can only claim a percentage of some expenditures.
Gifts to customers or clients fall under this umbrella. These gifts are only are deductible up to $25 per person. If you show your appreciation to your best client with a $100 bottle of bourbon, you can claim a deduction for only $25—the other $75 is on you. But if you give him a $20 bottle of wine, you can deduct the whole expense because this is under the $25 limit.
Not all "gifts" are considered gifts for tax purposes, either. Some of these costs might be considered promotional. This is typically the case with items that cost you $4 or less. These are fully deductible as long as they bear your business name and you distribute a lot of them, such as pens you might offer to anyone who signs a contract with you.
Likewise, gifts you make to your employees are usually fully deductible. And you might be able to claim a gift expense as a meals and entertainment expense instead to increase the amount of your deduction.
Meals and Entertainment Expenses
These business costs are typically deductible up to 50 percent of the expenditure. The meal or entertainment event must be somehow business-related. If you take that same client to dinner and you purchase a $100 bottle of bourbon to share with the meal instead of giving the bottle to him outright, your deduction doubles from $25 to $50, or half the purchase price. And you can deduct half the cost of the meal and the tip, too.
Automobile and Transportation Expenses
You can deduct the portion of your automobile and transportation expenses for miles you drive for business purposes. This doesn't include travel costs to another city or location—that's a separate category and it's fully deductible. Transportation costs are those you incur in the daily course of doing business.
Your business miles must be separated out from your personal miles. This can admittedly get complicated so it's beneficial to keep a log, either in your smartphone or on a notepad stashed in your glove compartment.
Here's an example. You run your business from home and you drive 20 miles each way to service a client's computer system. Then you make a side trip of five miles to pick up some dinner on your return trip home. Technically, you must subtract 10 miles—assuming the meal pickup was five miles each way—from the total 50 miles you drove on that outing. So 40 of your miles are tax-deductible. You can't add that other 10 on.
Now you have a choice to make. You can either deduct your actual cost incurred in driving those 40 miles or you can deduct the standard mileage rate of 58 cents per mile as of 2019, up from 54.5 cents in 2018. The standard mileage rate tends to increase a little annually because it's indexed for inflation.
If you drove 30,000 miles during the year overall and 15,000 of those miles were business-related, your deduction equals 50 percent of your actual auto expenses. These include things like depreciation, auto loan interest, fuel, maintenance, insurance, and registration. Or you can simply deduct $8,700, or 15,000 miles times 58 cents.
Obviously, you'd want to use whichever deduction works out to more.
Home Office Expenses
You can also claim a deduction for expenses involved in maintaining a home office, but only the portion of the expenses that are associated with the area of your home that you use exclusively for business.
The IRS also gives you a choice regarding this deduction. You can use the simplified method and claim $5 for each square foot of your home that's devoted to your business, or you can deduct a percentage of your overall costs equal to the percentage of your home that you use for business. The simplified method caps out at 300 square feet.
If your home office takes up 15% of your home's total square footage, and if the total costs of maintaining your home for the year were $42,000, you could claim a $6,300 home office deduction, or 15% of $42,000. But if that 15% works out to 525 square feet, your simplified method deduction would be just $1,500 because you're limited to 300 square feet. Calculate the deduction both ways to determine which works out to more based on your personal circumstances.
Most taxpayers find that percentage method is more advantageous, particularly those with large home office areas. Your actual expenses include rent or mortgage, insurance, utilities, repairs, and maintenance made solely to your office space. They also include depreciation if you own your home rather than rent.
You must use your home work space solely for business purposes to qualify. If the room you use does double duty as your child's playroom, or if it's also your bedroom, you can only claim a deduction for the square footage of the space where you actually work, not the entire room.
It must also be your principal place of business. This doesn't mean that you can't make house calls to repair computers, but you must actually run your business from your home location.
Some business expenses are never deductible even though they might be directly related to your trade or profession, including bribes and kickbacks—which are often illegal to begin with—and contributions to political parties or candidates. Dues and membership fees you might pay for social clubs are not deductible, nor are lobbying expenses, penalties, and fines.
Refer to Publication 535, Business Expenses on the IRS website for more information on these expenses.
How to Deduct Business Expenses
In all cases, you must complete and file Schedule C or Schedule C-EZ with your tax return to itemize your business expenses and to calculate how much business income is left over after you deduct them.
NOTE: Schedule C-EZ is appropriate if your business expenses were $5,000 or less, if you use the cash method of accounting, never held any inventory, and do not have a net loss.
The resulting number is then entered on line 12 of Schedule 1 of the new 2018 Form 1040 as your taxable income from your business. The total of Schedule 1, which includes other sources of income and some additional deductions called adjustments to income, then transfers to line 6 of the 1040.
NOTE: The 2018 Form 1040 is significantly different from the tax returns in use in previous years. With the exception of Schedule C, these lines and tax schedules do not apply to years 2017 and earlier.