Whether you're a solopreneur, a small business, or a corporation, understanding what you can write off as a business expense is crucial for maximizing your profits and staying compliant with the law. This guide will explain the myriad of expenses that you can claim, from the obvious to the less apparent, ensuring you leave no stone unturned while keeping your finances above board.
Before we dive in, remember that the rules can vary depending on your location. This guide primarily addresses the IRS regulations for U.S.-based businesses. Always consult with a tax professional or accountant to ensure you're acting within the bounds of the law for your specific situation.
Deductible Business Expenses: An Overview
The IRS allows businesses to deduct ordinary and necessary expenses. These are expenses that are common and accepted in your industry or trades, and are helpful and appropriate for your business. Here's a quick rundown.
Ordinary expenses are typical in your line of business, while necessary expenses are necessary for the operation of your business.
Office Equipment and Technology
Reusable assets like computers, printers, and office furniture can be claimed as depreciable assets. The IRS allows you to claim a portion of these assets each year as a deduction. For equipment under $2,600, the entire cost can be deducted immediately with Section 179.
Running costs like software licenses, ink, and maintenance can also be claimed. In the case of equipment used both for work and personal use, you can claim a percentage of the costs corresponding to the proportion of business use.
Office Supplies and Software
Items like paper, pens, and janitorial supplies can be claimed as direct expenses. Also, if you use software for business purposes, you can deduct the annual subscription cost. The entire cost of software or apps up to $2,600 can be written off immediately with Section 179.
If you use existing software for work, you can also claim a portion of the subscription cost if it's not used exclusively for business.
Allowable Business Expenses: Diving Deeper
Now let's delve into more specific categories of allowable business expenses.
Remember, expenses must be correctly documented and kept on file to be validated in case of an audit. Receipts, invoices, and documentation that demonstrates the expense's deduction is recommended.
Vehicle and Travel Expenses
Vehicle expenses can be claimed in one of two ways: actual expenses or the standard mileage rate plus related expenses. You can also claim 50% of meal expenses while traveling, as well as 100% of meal costs in certain foreign countries.
The IRS also accepts the use of ride-sharing services for business, but you'll need to keep the receipts or use a tracking app to accurately report the expenses.
Business Insurance Policies
Premiums paid for business insurance are deductible, assuming the insurance is actually incurred for your business. These can include liability insurance, workers' compensation, property damage, and business interruption insurance.
Be aware that life insurance premiums paid on behalf of employees generally are not tax-deductible. Also, car insurance for company vehicles is deductible up to 5% of the vehicle's market value.
Vague Yet Allowable Business Expenses: A Word of Caution
Some expenses may seem ambiguous, but when used correctly, can actually save you substantial tax money. Let's look at a couple of these categories.
Remember, when claiming these expenses, always ensure that they are reasonable, necessary, and adequately documented.
Business Meals and Entertainment
While meal and entertainment expenses have been restricted by the Tax Cuts and Jobs Act, some still apply. Meals directly related to running your business are 50% deductible. For example, business meals with clients.
Entertainment expenses can also be claimed, but only if they are ordinary and necessary. However, the cost of admission to sporting events and country club memberships is no longer deductible. Always document the name and date of the establishment and the purpose of the entertainment expense.
Home Office Expenses
Again, follows the recent changes. A home office is deductible if it's your principal place of business, or if you use it to meet or deal with clients or patients. You can choose to deduct a fixed percentage of your mortgage or rent, plus some of the other expenses you incidentally incur.
The home office deduction might seem like free money, but it can be a red flag for an audit. Make sure to keep records supporting the calculation of your deduction.
Managing your business's finances can feel overwhelming at times. But with a deep understanding of what's deductible and regularly staying on top of your expenses, you can significantly improve your business's profitability. Consult with a tax professional or accountant to ensure you're maximizing your savings while staying on the right side of the law.