You spend a lot on your business. Thankfully, the IRS allows you to deduct business expenses to lower your taxable income. Said another way: the more deductions you have, the lower your taxable income and the less income tax you pay.
But what business expense qualifies for this deduction? What does the IRS consider as reasonable business expenses? We’ll cover what every self-employed, freelancer and small business owner needs to know.
What are deductible business expenses?
Most of the work involved in doing your taxes will go into determining what deductions you can take, how much you can take, and when you can take them. You don’t have to become an income tax expert. But even if you have a tax professional prepare your tax returns, you need to have a basic understanding of what expenses are deductible so that you can keep proper records.
This takes some time, but it’s worth it. There’s no point in working hard to earn a good income only to miss deductions to which you are entitled and turn over more of your income to the government than required.
What kind of expenses can I write off?
Virtually any expense is deductible as long as it is:
- Ordinary and necessary
- Directly related to your business
- For a reasonable amount.
Ordinary and necessary expenses
An expense qualifies as ordinary and necessary if it is common, accepted, helpful, and appropriate for your business or profession. An expense doesn’t have to be indispensable to be necessary; it need only help your business in some way, even in a minor way. It’s usually fairly easy to tell if an expense passes this test.
Expense must be related to your business
An expense must be related to your business to be deductible. That is, you must use the item you buy for your business in some way. For example, the cost of a personal computer is a deductible business expense if you use the computer to write business reports.
You cannot deduct purely personal expenses as business expenses. The cost of a personal computer is not deductible if you use it just to play computer games. If you buy something for both personal and business reasons, you may deduct the business portion of the expense. For example, if you buy a cellular phone and use it half the time for business calls and half the time for personal calls, you can deduct half the cost of the phone as a business expense. However, the IRS requires you to keep records showing when the item was used for business and when for personal reasons.
Reasonable business expenses must be reasonable
There is usually no limit on how much you can deduct as long as it’s not more than you actually spend and the amount is reasonable. Certain areas are hot buttons for the IRS, especially entertainment, travel, and meal expenses. The IRS won’t allow such expenses to the extent it considers them lavish.
Also, if the amount of your deductions is very large relative to your income, your chance of being audited goes up dramatically. You’re relatively safe as long as your deductions don’t exceed about half of your revenue. If you have extremely large deductions, make sure you can document them in case you’re audited.
Are meals deductible insurance as a business expense?
You are allowed to deduct 50 percent of business meals. To get this write off, you must discuss business during the meal.
Some common, tax-deductible business expenses
- Advertising costs, such as the cost of online advertisement, brochure, or business website
- Attorneys’ and accounting fees for your business
- Bank fees for your business bank account
- Business start-up costs
- Car and truck expenses
- Costs of renting or leasing vehicles, machinery, equipment, and other property used in your business
- Depreciation of business assets
- Education expenses, such as the cost of attending professional seminars or classes required to keep up a professional license
- Expenses for the business use of your home
- Fees you pay to people you hire to help your business, such as the cost of paying a marketing consultant to advise you on how to get more clients
- Health insurance for yourself and your family
- Insurance for your business, including liability, workers’ compensation, and business property insurance
- Interest on business loans and debts—for example, interest you pay for a bank loan you use to expand your business
- License fees, such as fees for a local business or occupational license
- Mileage deductions for the miles you drive a personal car for business reasons
- Office expenses, such as office supplies
- Office utilities
- Professional association dues
- Professional or business books other publications you need for your business
- Repairs and maintenance for business equipment, such as a photocopier or fax machine
- Retirement plan contributions
- Software you buy for your business
- Subscriptions for professional or business publications
- Business travel and meals
- Wages and benefits you provide your employees.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.