By Rich Best
One of the biggest advantages of operating your own business is that almost every activity you perform that incurs an expense is tax deductible. That’s the good news! The bad news is that, if you keep poor records and you are not paying attention on a daily basis to the tax implications of your business activities, you are likely to miss out on some valuable deductions, or worse, irritate the IRS agent during your tax audit.
Which Business Expenses Are Deductible?
The easiest way to ensure you are getting the most from your business deductions is to organize your activities and record keeping system around your deductible business expenses. Generally, expenses are deductible if they are considered to be “ordinary” and “necessary” in the operation of your business. The following is a list of deductible expenses common to most businesses:
Advertising: Expenses associated with promoting and marketing your business such as newspaper and television ads. Business cards are an advertising expense.
Business Development Fees: Fees paid to non-employees for referrals and business development.
Contract Labor: Payments made for any outsourced activities such as for a virtual bookkeeper
Insurance: Premiums paid for any business-related insurance such as liability or business property insurance. Homeowner and vehicle insurance may be deductible to the extent your house and car are used for business purposes.
Interest Expense: Mortgage interest on business property and any interest expense incurred through business debt, including credit card finance charges, and installment loan interest.
Office Expenses: Purchases of supplies, postage, books, and reference materials used exclusively in your business are all deductible.
Supplies: Items used in the conduct of your business, such as maintenance, cleaning supplies, packaging materials.
Legal and Professional Fees: Fees paid for the services of an attorney, accountant, a financial planner, or tax preparer are deductible if the services are necessary for the business.
Rent or Lease: Rent payments for the use of business property are deductible.
Licenses: If your business requires a license of any kind, the costs associated with acquiring and maintaining it are deductible.
Taxes: Taxes incurred as a result of the operation of your business are generally deductible. These include property taxes, state or local income taxes, and retail sales taxes. All taxes associated with payroll, such as Social Security, Medicare, FUTA, and state unemployment tax.
Wages: Any form of compensation paid to an employee is a deductible expense, including employee benefits such as health plan and retirement plan contributions.
Health Insurance Premiums: Generally, health insurance premiums are deductible to the extent that you have income.
Travel: Any expense incurred by you or an employee while away from home for business purposes is tax deductible. including transportation, car rental, baggage shipping, and lodging.
Meals and Entertainment: Any activity performed with a client considered to be ordinary and necessary for a clear business purpose, such as entertainment, dining, or recreation (golf outing). The deduction for these expenses is limited to 50%. Business gifts are also deductible up to one deduction per year, per customer of $25.
Education Expenses: The costs for tuition and books for education related to your current trade or business can be deducted if they meet strict guidelines.
Bad Debt: If a receivable was recorded as part of gross revenue, it may be deducted if it is ultimately deemed to be uncollectable. Cash method accounting does not allow for bad debt deductions.
Start-up Costs: Under the American Jobs Creation Act, expenses associated with the start-up of a business may be deductible. New business owners are allowed to deduct up to $5,000 for start-up costs and another $5,000 for organizational expenses incurred in the first year of the business. Expenses that are not incurred in the first year may be amortized over 15 years.
Vehicle Expenses: Generally all of the expenses incurred while operating a vehicle for business purposes are deductible. If you or an employee uses a personal car for business purposes, the portion of expenses actually incurred while using it for business are deductible. You may choose between two methods for determining vehicle expenses:
- Actual expenses – The actual operating costs of the vehicle are reported, including maintenance, fuel, registration, storage, insurance, and depreciation (if you personally own the vehicle).
- Standard mileage – If you own or lease your vehicle, you can apply the standard mileage rate (the 2015 rate is 57.5 cents per mile) to the miles driven for business purposes. You can use this method if it has been applied since the vehicle was placed in the service of your business. Fees for parking, tolls, finance charges and taxes (applicable to the business use of the vehicle) may be added to the standard mileage calculation.
Depreciation: Property acquired for use in your business is not fully deductible in the year it is purchased. Instead, the cost is allocated, or depreciated, over multiple tax years. Business property such as furniture, buildings, computer equipment is included as depreciable assets.
Business Use of Your Home: If you use your home or a part of it exclusively for business, you may be able to deduct a proportionate amount of your home’s expenses, such as mortgage interest, utilities, repairs, and insurance on your Schedule C (Form 8829, Expenses for Business Use of Your Home is used to calculate expenses). You must be able to meet some strict requirements in order to establish that your home is your principal place of business.
Managing Your Deductions
Remember, all of your business expenses have to be ordinary and necessary to the operation of your business. Each expense must be logged, and a supporting document, such as a receipt or cancelled check, must be on file and ready to present to the IRS. On any given day, you are likely to generate a dozen or more deductions in the course of conducting regular business activities, so it is easy for some to slip through the cracks. Therefore, it is vitally important to have a sound record keeping system in place in order to get the most from your deductions and avoid any problems.
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.