How to Write Off Business Expenses

Are you ready to start deducting all of your business expenses? If so, you’re going to need a master list of the tax write offs, deductions and credits for small business owners that you should be taking advantage of. Now, before we get started let me just say that there are many different types of deductions and credits available.

Many of the business expenses that businesses incur are deductible on their tax returns. Regulations, however, can be confusing and sometimes difficult to follow for those just starting out in business. Here we try and make it easy and practical with a few examples to help you decide for yourself what is and isn’t tax deductible.

What Are Business Expenses?

If you are an employee at a company, you more than likely won’t need to purchase anything out of pocket in order to do your job. In fact, the Fair Labor Standards Act (FLSA) prevents employers from charging employees for their own equipment—so long as doing so would reduce their pay below minimum wage. However, people who run their own businesses face a plethora of expenses that they must shoulder personally.

For example, someone running a retail store needs to buy inventory. Someone running a restaurant needs to purchase food. Someone running a childcare facility needs to purchase toys and play equipment. And many business owners need to hire help to run their business, whether that means full time employees or part time independent contractors.

Since these supplies are not for personal use, the IRS allows business owners and self-employed individuals to write these expenses off against their income. That means the business owner can subtract the cost of these expenses (or a portion thereof) from their total income, so the resulting amount creates a smaller tax burden.

Why Write Off Business Expenses?

In some instances, a self-employed individual or business owner may even be able to write off enough taxes to lower themselves into a more desirable tax bracket. When done according to the accounting rules and regulations of the IRS, this is perfectly legal. In fact, it’s illegal to avoid writing off certain expenses, since doing so can inflate the appearance of your income beyond what actually makes it to your bank account.

What Business Expenses Can I Write Off?

1. Self Employment Taxes

If your business is set up as an S-corp, you can deduct part of your self employment taxes. Since you are putting yourself on the payroll, what’s technically happening is that you and your “employer” (that is, your business) are splitting the FICA taxes, just as if you received a paycheck from a job. You can deduct the “company” half of these taxes as a qualified business expense.

2. Home Office Deduction

As previously mentioned, you can deduct a portion of your rent or mortgage as a home office deduction. The standard home office deduction will allow you to claim up to $1,500 per tax year as a deduction, while the area method and number of rooms method can allow you potentially claim more, provided you are truly using those rooms for business activities.

3. Business Travel Expenses

If you need to travel for business, you can claim a travel tax credit as long as your business trip was planned in advance and the majority of days involve business activity, such as meeting with clients, suppliers, partners, or investors. This rules out handing out a few business cards on your vacation to Hawaii and attempting to claim it as a travel expense, although it does not rule out combining business and personal vacation time in a way that meets IRS requirements.

In a similar category, you can also write off meals for 50 percent of the capital expense, provided that said meals are not extravagant or lavish. You will have to use personal discretion here, because a $500 dinner in a Manhattan restaurant may not be extravagant in some contexts. In any case, until 2022 you can actually write off 100 percent of the cost of a meal if it is related to conducting business.

Unfortunately, the Tax Cuts and Jobs Act of 2017 eliminated writing off entertainment expense, so if entertainment is connected to the meal (such as a dinner theatre experience), you will need to make sure the cost of food and drinks is itemized separately, otherwise you will not be able to claim a business deduction for it according to the 50 percent method.

4. Vehicle Expenses

If you use a personal vehicle for work purposes, you can deduct $0.56 for every mile driven while working, but not while commuting to and from your place of work (because commuting is not considered a tax-deductible business activity). However, if you conduct your work at several locations, you should be keeping track of mileage. Traveling salespeople, real estate agents, quality control managers, tutors, and delivery drivers should all be keeping track of all work-related mileage. While this is hard to do by relying on the odometer itself (unless you are constantly writing down your mileage at the beginning and end of your workday) there are apps that make it easier and can calculate the work-related mileage for you.

You can also use an actual expense method instead of the standard mileage rate. This is done by adding all car expenses (gas, oil, registration, car insurance, repairs, and even depreciation) and multiplying it by the percentage of total time you use your car. For example, a gig worker who spends $6k on their vehicle annually (between gas, insurance, maintenance, and depreciation) and uses their vehicle 50 percent of the time for shuttling customers around, can deduct $3k against their gross income. While the standard mileage rate is easier to keep track of, you may find that using the actual expense method yields a higher deduction.

5. Marketing, Insurance, Education, Memberships, and Subscriptions

Any expenses paid for marketing, advertising, insurance, education, memberships, subscriptions are a deductible business expense.

For example, if you own a restaurant and subscribe to an industry publication for the food business, you can write it off as a business expense. Facebook and Instagram ads are also deductible.

6. Retirement Contributions

You can also deduct retirement contributions. Recent changes to the tax code have made self employment 401(k)s much more attractive to business owners, as these investments can be written off as a business expense, and up to 25 percent of eligible personal income can be allocated toward the retirement account.

These self employment accounts have different names at different financial institutions, such as the Solo-k, One Participant k, and Individual k. Speak to a tax professional about your long term personal financial goals and how this particular tax credit might be beneficial.

How to Write Off Business Expenses

Now that we’ve given a few examples of business expenses that can be written off, let’s talk about how you can go about claiming these write offs:

1. Categorize Purchases (Qualifying vs Non Qualifying)

Before the calendar year begins, you should have an idea of which expenses can be written off as business expenses. You should also be using software to track your expenses.

As a best practice, using a credit card or debit card dedicated solely to business related purchases will make it much easier to conduct your accounting at the end of the year. This business card could be used to pay for your website, freelance contractors, social media ad credits, transportation taken to business meetings, and the hardware you use for your business (a laptop, for instance).

It’s important to keep in mind that not everything you use for your business is fully deductible. For instance, there are very specific rules around whether or not you can deduct a business trip—namely, the trip must be planned and the majority of its days must involve conducting some sort of business. You also cannot deduct all the gas purchases for a vehicle that is used personally, but you can deduct $0.56 per mile.

There are a number of different qualifying business expenses that can be deducted. Keeping track of your purchases throughout the year, even if it seems to be just nickels and dimes, can go a long way toward snowballing into a significant tax write off at the end of the year.

2. Add Up Qualifying Expenses

If you’ve kept track of your business expenses throughout the year, it should be no problem adding them up so you can deduct them from your gross income. Some accounting software, like Quickbooks, will do all of this for you. If you’re doing it the old-fashioned way by saving receipts, that’s okay too—you’ll just have to invest more time adding it all up when it comes time to file your taxes.

You might be wondering what constitutes as a business deduction for the tax year. There is an annual IRS publication that lists small business tax deductions and how they work. Every small business owner should familiarize themselves with these common business tax deductions so that they know which expenses to track.

3. Add Total to Schedule C

Once you’ve added everything up, you will list the totals on the itemized deductions on Schedule C found of Form 1040. This form is used for filing personal income taxes, whether you are employed, self-employed, or run a business as a sole proprietor or LLC.

It’s important to note, however, that if you have structured your business operations as a corporation, you will need to file a corporate tax return. The total amount of expenses for  business purposes will be subtracted against your gross income to arrive at your adjusted gross income, which is the amount on which you will pay in self employment tax.

The self employment tax is 15.3 percent, which is higher than most people want to pay in terms of income tax. This is why many a small business owner chooses to structure their business operation as a corporation. In this structure, they put themselves on the payroll and pay themselves a salary so that they don’t need to pay the self employment tax on the entirety of their income, just a smaller portion.

How to Deduct Business Expenses

Identifying Business Deductions

1. Save your receipts. As best as you can, you should save your receipts for all business expenses.^[1] Although receipts are not absolutely necessary, they are the best way to prove an expense. You should also write helpful notes on the receipt, including the name, title, and company of the client you entertained and the date, location, cost, and purpose of the expenditure. For example, if you take a client out to dinner, then you should make a notation on the back of the receipt that you talked about business, since this is a requirement for claiming a meal deduction.^[2]
   • Get a big folder and throw your receipts into the folder. This way, you will have everything in one place when you sit down to do your taxes.
   • If you want to be more organized, then you can create a running spreadsheet and enter business expenses weekly or daily. You should still hold onto your receipts.
2. Check if an expense was “ordinary” for your business. You can claim a business expense for almost anything; however, the expense must be “ordinary” for your trade or business.^[3] “Ordinary” means “normal, common, and accepted under the circumstances by the business community.”
   • For example, purchasing office supplies and paying for postage are ordinary costs incurred for most businesses.
   • However, purchasing a yacht and branding it with your business name does not count as an “ordinary” expense.
3. Ask if the expense was “necessary.” The expense must also have been necessary for the conduct of your trade or business. This does not mean that the expense was “indispensable.” However, it must be helpful and appropriate for your business.^[5]
   • For example, joining a trade association would be a deductible expense.^[6] Membership in an association would be helpful and appropriate for your business.
   • However, joining a private club that has nothing to do with your trade or business would not be a “necessary” expense.
4. Identify capital assets. If you acquired an asset that will benefit your business for more than one year (for instance, a vehicle, computer, office furniture), then this is considered a capital asset and cannot be expensed. This can be tricky, as this can change on a case by case basis. Depending on how it is used, an item could be a capital asset for one business and a deductible expense to a different business. Or, for instance, a repair on an item might be considered a deductible expense, while an improvement to that same item might be considered a capital asset. Work closely with your accountant to determine which items are capital assets and which are deductibles.
   • Capital assets can be amortized (if they are intangible) or depreciated (if they are tangible); however, and you can count the value by which the asset has amortized or depreciated as an expense.
   • If you are unsure if an asset is considered a capital expenditure, you and your accountant should refer to the IRS, which has classified some categories of common capital expenditures.
5. Identify common business expenses. There are many common business expenses which you can claim. For example, you could claim the following:^[7]
   • Contributions to retirement plans. This includes contributions to your own plan as well as to your employees’ plans.
   • Employee compensation. Generally, you can deduct the amount you pay your employees.
   • Insurance. You can generally deduct for the necessary and ordinary costs of insurance if it is for your profession, trade, or business. For example, liability insurance, medical insurance for employees, malpractice insurance, and credit insurance are all deductible.
   • Rent. You can deduct rent if you use the property for your trade or business. You can’t deduct if you have, or will receive, equity in or the title to the property.
   • Taxes. You can deduct various foreign, federal, state, and local taxes if they are directly attributable to your business.
   • Fees. Franchise royalties and fees are deductible. Franchise fees must be amortized (deducted) over 15 years.^[8]
   • Other. See IRS Publication 535 for more details.^[9]Advertisement

Calculating Your Business Expenses

1. Separate out personal expenses. You cannot take deductions for personal, family, or living expenses. However, some expenses might be split. In this situation, you can claim as a business expense the portion that was used for business purposes.^[10]
   • For example, you might have taken out a $5,000 loan. If you used $1,000 for a family trip but $4,000 for your business, then you can take the $4,000 as a business deduction. However, remember that this $4,000 is deductible only if it is used for allowable expenses in the business.
2. Calculate your home office deductions. You can take a home office deduction, but only if you use a dedicated portion of your house exclusively and regularly for business. You cannot claim your living room sofa is a “home office” if you also lie there to watch television. Your home office must also be your principal place of business.^[11] You have two options for calculating your home office deduction:
   • You can use the simple method. Multiply the number of square footage of your office by $5. You cannot claim more than 300 square feet. You may also claim home-related itemized deductions.
   • Alternately, you might calculate the actual costs of the home office. This requires that you calculate the percentage of your home devoted to business use. You can then deduct a percentage of mortgage interest, insurance, utilities, repairs, and depreciation.
3. Calculate the deduction for your automobile. If you use your automobile for both personal and business purposes, then you can deduct the percentage used for business.^[13] You have two ways of calculating your deduction:
   • Standard mileage rate. For example, if the mileage rate for 2016 business use of your car is 0.54 cents per mile, then calculate the number of miles you drove for business purposes and multiply this number by the mileage rate.^[14]
   • You could instead calculate your actual car expenses, which include oil, gas, tolls, parking fees, registration fees, lease payments, insurance, and other expenses. However, many people find that the mileage method provides a higher deduction. Compare the two and use the highest number.
4. Determine how much of your travel expenses are deductible. As with other types of deductions, you can only deduct the portion of your travel expenses related directly to business activities. All of your transportation expenses, like the flight, car rental, taxis, baggage fees, and any other tips or fees related to transportation can be deducted as long as you are traveling directly between business or lodging locations. You can also deduct 50 percent of the cost of meals and entertaining while away from home. Any other activities you pay for while traveling that are not directly related to business activities cannot be deducted.
5. Calculate the amount you can deduct for entertaining clients. You can deduct for meals with clients, as well as for other entertainment. You may deduct 50 percent of the cost of meals while you are at your home location (not traveling).^[16] There are many limitations and exceptions, such as:
   • The main purpose of the meal or entertainment must have been to conduct business and you did conduct business, but you do not have to provide proof of profit from these activities. Alternately, the entertainment must be associated with your business and take place before or after a business discussion.
   • The 50 percent covers taxes and tips, as well as cover charges to get into a club. However, the cost of transportation to and from the entertainment is not subject to the 50 percent limit.
   • The 50 percent is intended to represent the cost of the client’s meal. In some cases, the deduction may be higher. For example, workers who are covered under the department of transportation’s “hours of service” limits may deduct up to 80%. This includes air transportation workers, interstate truck and bus drivers, certain railroad employees, and certain merchant mariners.
6. Read IRS publications if you have questions. Many deductions fall into gray areas. For example, you can claim an automobile business expense for some travel but not all. You can’t deduct for your morning commute from your home to your office. However, you could deduct for transportation expenses if your home is your principal place of business and you go between your residence and another work location, like a client’s home or business.
   • IRS Publication 463 describes in detail travel, entertainment, gift, and car expenses.^[18] You should consult this publication if you have questions about whether an expense qualifies as a business deduction.

Completing Your Taxes

1. Claim deductions on Schedule C. If you are a sole proprietor or the sole owner of an LLC, you can claim your business deductions on Schedule C (Form 1040). You are also responsible for any self-employment tax from the net income of your company, but you may deduct half of this tax as a business expense. For example, you can claim deductions for the following on this schedule:
   • Advertising
   • Car or truck expenses
   • Contract labor
   • Insurance
   • Interest
   • Legal and professional services
   • Office expenses
   • Pension and profit sharing
   • Rent
   • Supplies
   • Taxes
   • Travel, meals, and entertainment
   • Wages^[19]
2. Report deductions on Form 1120. Corporations fill out a different tax form. They should claim their deductions on Form 1120. You can report the following deductions on this form:^[20]
   • Compensation of officers
   • Salaries and wages
   • Bad debts
   • Rents
   • Taxes and licenses
   • Interest
   • Charitable contributions
   • Advertising
   • Pensions and profit-sharing plans
   • Employee benefit programs
   • Other deductions
3. Get professional help, if needed. You don’t have to complete your taxes on your own. You can also seek out the help of qualified tax professionals who can look at your business expenses and tally up your business deductions for you.
   • To find a certified public accountant, you should contact your state’s Society of Certified Professional Accountants.^[21] You can find your state’s Society online.
   • Look for a “Find a CPA” link on the website. The Society might have a list of CPAs you can browse or there may be a number to call for a referral.
   • You can also ask for referrals from other business owners. Ask them if they would recommend their accountant.

Conclusion

Whether you’re just getting started or if you’ve been in business for years, business expenses can add up quickly. Whether it’s office supplies, travel costs, meals while out meeting clients, or other expenses, there are a lot of ways to cut your tax bill through smart deductions.