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Learn moreWhat is a tax-deductible business expense?
A business expense is a cost that comes with operating your business. Within that range of costs you will have deductible expenses—these are expenses which are eligible for tax deductions. It is important for all businesses to carefully keep track of their deductible expenses for tax purposes, but it’s even more critical for small businesses.
Over 50% of small business owners feel they are paying too much in taxes, and they’re probably right. Taking advantage of established deductible business expenses can save your business thousands or even tens of thousands of dollars every single year.
What business expenses are deductible?
Tax-deductible business expenses are defined by the IRS as expenses that are both ordinary and necessary. According to the IRS:
- An ordinary expense is “common and accepted” in your trade, industry, or business
- A necessary expense is “helpful or appropriate” for your trade, industry, or business
A deductible business expense may fall under these two categories, ordinary or necessary, and are eligible to be deducted when you file yearly taxes. Deductible expenses are things you will already be purchasing or spending money on, but you can take advantage of these expenses for tax credits. These tax write-offs might be total, partial, or applied over time, and come in all forms of business expenses.
Although it can mean more careful tracking and more detailed tax filings, the financial benefits for your business can be immense. You will likely have questions—fortunately, the IRS offers additional information about how to go about deducting business expenses.
Here are a few of the most common areas for business expenses that are tax deductible:
Our list of common deductible business expenses
- Mileage and vehicle expenses
- Rent and utilities
- Marketing
- Employee pay and benefits
- Gifts
- Miscellaneous or general office expenses
- Charitable contributions
- Home office and other home expenses
Mileage and vehicle expenses
Annually, Americans take more than 400 million business trips every year and 81% of trips are taken by vehicle. Luckily you have two options for deducting these costs from your taxes: the actual expenses method and the standard mileage method.
The Actual Expense Method
In some ways this method is more comprehensive, because it covers more aspects of the cost of travel. It can include gas refills, oil changes, insurance, and the cost of vehicle depreciation. The catch is that only a percentage of these costs can be deducted.
You can calculate this percentage with a simple formula: Just divide the number of miles you drove for business travel and divide it by the total number of miles you drove for the fiscal year.
Example
If you drove 20,000 miles in 2021, and 3,000 of those miles were for business trips, you would divide 3,000 by 20,000 to get 0.15, or 15%. This is the percentage of your vehicle that is used for business purposes, and you would be able to deduct 15% of the cost of car washes, repairs, and other necessary vehicle expenses.
The Standard Mileage Method
This method is more straightforward, and depending on your situation it may add up to a higher deduction. It is based entirely on the number of miles you drove for business purposes, and does not include other expenses such as insurance.
The IRS Standard Mileage rate for 2021 is 56 cents for every business mile driven. Logged miles can be claimed as a tax deduction when the employee travels for business trips or for local transportation for business purposes and requires reimbursements.
Example
If you drove 1,000 miles for business trips in 2021, you would multiply that amount by 0.56 to get a total of 560. This means you could deduct $560 for travel expenses.
Keep in mind that a daily commute does not count as a travel expense, and you’ll need to keep careful documentation of your business trips to make sure you’re filing your deductions correctly.
Rent & utilities
Are you paying rent on an office building, a storefront, or even a single room as part of your business? Then you can deduct that expense. Unfortunately, this does not apply to any rent-to-own properties. You can also deduct utilities for your working space, such as electricity and water bills.
Marketing
Everyone wants to promote their business, but marketing can be expensive. Luckily you can deduct any marketing costs that are used to generate or keep customers. This includes online banner ads, websites, billboards, flyers, and more. However, marketing that is intended to influence legislation cannot be deducted.
Employee pay & benefits
The salary and benefits you pay your employees are tax-deductible expenses. This includes any bonuses and commissions.
- The compensation must be reasonable: Others in these roles are getting paid similarly.
- Sums must be paid out: You cannot claim deductions for payroll that has yet to be issued.
- Special attention must be paid to business owner compensation: Not all business owner pay can be classified as a deduction. You must follow IRS guidelines when deducting business owner pay.
These rules are designed so business owners cannot take advantage of compensation that is being paid unfairly to employees or owners. There are additional stipulations from the IRS so be sure to research carefully before deducting.
Employee benefits are a huge cost to employers and vital to employees. As a business owner you can deduct health insurance, retirement plans, variations of life insurance, dependent care, employee discounts, and more. Keep track of the various business expenses you incur for employee benefits so you can maximize your benefit deductions at the end of the year.
Gifts
Random gift expenses are a minimal business deduction and cap out at $25 per person annually. You do not need to claim gifts given to clients if they are less than $4, widely given, and display the company logo (think low-cost company SWAG like pens).
General office expenses
Some general office expenses include (but are not limited to):
- Bank fees and interest
- Business insurance
- Software
- Office furniture & supplies for the workplace (soap, toilet paper, etc.)
- Memberships & subscriptions
- Legal fees
Charitable contributions
Charitable contributions can increase employee morale, improve workplace culture, and demonstrate your organization’s investment in your own community. If your business is donating to charity, it makes sense to deduct these expenses and receive the appropriate tax benefits.
Most charitable cash donations qualify for a deduction, with the exception of donations made to supporting organizations, charitable remainder trusts, and most private foundations. You also cannot carry forward donations from previous years, or deduct donations made to establish or maintain a donor-advised fund.
Home office and other home expenses
If part of your home is used exclusively for conducting business, AND your home is your principal place of business, you may be able to deduct a portion of your home expenses. Some of these expenses can include a portion of mortgage interest, home insurance, utilities, and possibly even certain preparation materials (such as a fresh coat of paint) and repairs.
How to maximize savings with business deductions
If you aren’t properly filing your business deductions, you’re leaving money on the table. Or, more accurately, you’re basically paying for things twice. Tax deductions are crediting you for purchases you’ve made for your business, so it’s crucial that you carefully document and file each of those purchases.
Accurately track your expenses
It’s difficult to maximize your business deductions when you don’t remember or have evidence of eligible business expenses. Find a system that works for your team which will track expenses and make it easy to categorize and find expenses throughout the year. Proper expense management will mean having access to every transaction so that business owners or accountants can properly deduct rent, marketing costs, and other tax write-offs.
Unlike personal taxes, you don’t use standard or itemized deductions when filing business taxes. Business tax deductions fall under three categories: Actual, ordinary, and capital.
Categories of business expenses:
- Actual expense: Actual expenses are deductions that are the actual cost of an item you get a deduction for. Ex: receipts and mileage driven.
- Ordinary expense: Ordinary expenses (or normal expenses) are expenses you incur when running a business. Ex: rental expenses, utilities, and benefits.
- Capital expense: Capital expenses cannot be deducted and need to be capitalized because they are investments in nature. Ex: improvements, business assets and start-up costs.
Capitalizing
Some business expenses are one-time purchases that are an investment to generate revenue, but will most likely depreciate over time. These types of purchases are typically equipment, real estate, or sometimes vehicles. One way to partially claim these purchases for deductible business expenses is to capitalize the expense.
Capitalizing an expense means claiming the depreciation of the purchase on the business’s income statement as a way to accurately reflect assets.