Deductible and Non-Deductible Small Business Expenses

Filing taxes for self-employed entrepreneurs and small businesses can be quite complicated. In addition, tax liabilities can vary widely depending on the accuracy of your record keeping and which deductions you take. Since small business people are required to pay 15.3% self-employment taxes on all taxable income, it is in your best interests to take every allowable deduction to lower your income as much as possible. Tax Credit

In order to lower your tax liability without getting in trouble with the IRS, you need to know which business expenses are allowable deductions and which are not allowed. In general, the IRS says that small businesspeople are allowed to deduct “ordinary and necessary” expenses related to running the business. However, “ordinary and necessary” are subjective terms, so it is helpful to have further clarification on what business expenses qualify as deductions.

What is Definitely Deductible? The good news for entrepreneurs and small businesses is the tax code contains numerous allowable tax deductions. These include:

• Home Office (must meet qualifications)
• Office Rent
• Office Supplies
• Office Furnishings
• Computers and Equipment
• Software and Subscriptions
• Mileage
• Travel Expenses (such as airfare and hotel)
• Meals and Entertainment (only 50% can be deducted)
• Business Insurance Premiums
• Retirement Plan Contributions
• Social Security Taxes
• Business Telephone Charges
• Advertising and Marketing
• Equipment Depreciation
• Service Fees
• Bad Debts
• Professional Fees
• Contracting Fees
• Labor (including hiring family members)
• Repairs and Maintenance
• Licenses
• Unavoidable Theft and Loss

What Might be Deductible? There are certain expenses that may be deductible depending on the size and type of the business. For example, if you have offices in several cities throughout the country, you might be able to deduct the cost of chartering a jet to fly between offices. However, if you are a one-man operation doing business out of a home office, leasing a jet may not be deemed “ordinary and necessary” for operating your business.

What Cannot be Deducted? The IRS explicitly prohibits personal expenses from being deducted for your small business. Some examples include:

• Commuting to and from work
• Groceries for personal use
• Personal meals and entertainment
• Personal vacations
• Clothing worn for work (unless you wear a required uniform)
• Traffic tickets
• Home telephone costs

There are numerous potential scenarios when your personal and business life can overlap. For example, you may take what appears to be a personal vacation to the Caribbean, but if you were to attend a business-related seminar while you are there, it could qualify as a business expense. The key is to structure as much business activity into your daily life as possible and fully document everything.

To find out which of your expenses can qualify as business deductions and to arrange your affairs to optimize these deductions in the future, speak with your local accounting firm.

Scroll to Top