Deductible Business Expenses
Many business expenses can be deducted dollar for dollar
Let's face it—it costs money to make money. Self-employed entrepreneurs must incur many common expenses in the course of doing business. Fortunately, the Internal Revenue Service gets that, and the IRS wants you to make money so it can tax you on that income. It allows you to deduct the costs of keeping your business up and running, and in many cases those expenses are fully deductible. That means that for each dollar you spend, you get to subtract a dollar from your taxable business income.
Other expenses can't be deducted dollar for dollar, but you still get a tax break for paying them. In all cases, you must complete and file Schedule C or Schedule C-EZ with your tax return to list them and calculate how much business income is left over. The resulting number is then entered on line 12 of your Form 1040 as your taxable income from your business.
And, of course, there are rules.
Fully Deductible Business Expenses
Any expense which is "ordinary and necessary" for your trade or business is deductible under Section 162 of the Internal Revenue Code. 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 did not make the expenditure.
That said, although all your expenses must be ordinary and necessary, not all of them are fully deductible. 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
Then there are expenditures for which you can only claim a percentage.
Gifts to Customers or Clients
Gifts to customers or clients 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 it's under the 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, and these are fully deductible provided that 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 may 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, your deduction has now doubled 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 can be beneficial to keep a written 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 drive 20 miles each way to service a client's computer system. On your return trip home, you make a side trip of five miles to pick up some dinner. 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. Forty of your miles are tax-deductible.
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 53.5 cents per mile as of 2017. 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 $8,025, or 15,000 miles times 53.5 cents.
Obviously, you'd want to use whichever deduction works out to more. .
Home Office Expenses
You can also claim a deduction on Schedule C for expenses involved in maintaining a home office. This deduction is also split between personal and business use, and only costs associated with the portion of your home that you exclusively use for business are deductible.
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 you use for business. If your home office takes up 15 percent 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 percent of $42,000.
Most taxpayers find that percentage method is more advantageous, particularly those with large home office areas. The simplified method caps out at 300 square feet. Your actual expenses include rent or mortgage, insurance, utilities, repairs and maintenance made solely to your office space, and depreciation if you own your home.
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 whole room. It must also be your principal place of business. This doesn't mean you can't make house calls to fix computers, but you must actually run your business from your home location. .
Some business expenses are never deductible even though they may be directly related to your trade or profession. They include:
- Bribes and kickbacks
- Contributions to political parties or candidates
- Dues and membership fees for social clubs
- Lobbying expenses
- Penalties and fines
For more information, see Publication 535, Business Expenses on the IRS Web site.
For more information on partially deductible expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.
For more information the home office deduction, see Publication 587, Business Use of Your Home
Edited and updated by Beverly Bird