Did you know that the average small business spends an average of $40,000 during its first year of operation? Running a business is undoubtedly expensive, especially when tax season rolls around.
The good news is that there are certain business expenses that you can deduct from the amount of money that you owe the IRS. But what are the different types of business expenses that fall under this category?
If you want to learn the answer to this question, then you’re in the right place. In this article, we’ll teach you everything you need to know about deductible business expenses. Let’s get started!
What Are Business Expenses?
Before we begin it’s important to first go over some basic definitions. For starters, let’s cover business expenses. These can be thought of as any costs that come with running and maintaining your business.
This can include everything from the rent that you pay on your storefront, to the number of people that you keep on your payroll. There are two types of business expenses. The first is a fixed cost expense.
These are expenses that don’t change in cost. The other type is a variable expense. These are costs that are subject to change. All of the expenses for your business should be recorded on your income statement.
What Are Some of the Different Types of Business Expenses That You Can Deduct?
The IRS allows you the ability to deduct certain business expenses from your income taxes. This decreases your tax liability. To deduct business expenses the IRS declares that they must be ordinary and necessary.
What does this mean? To be ordinary an expense must be common for your type of business. To be necessary the expense needs to be helpful and appropriate for your business.
So, what are some of the common types of expenses that you can include? To give you a better idea in this section we’ll go over some of the common ones.
Does your business operate on a model where you manufacture or purchase inventory for resale? If the answer is yes, then you can deduct this from your taxes.
This includes things like the costs of the goods or raw materials, storage, freight, labor cost, and any factory overhead.
Business Property Rent
If you rent or lease your business property, then you can deduct this from your taxes. But what if you work from home? Don’t panic. You can run an eligibility test with the IRS.
In many cases, you will be able to deduct your rent, mortgage payments, repairs, and utility costs.
In addition to your property rent, you can also deduct utilities from your taxes. This includes things like electricity, water, telephone bills, and trash costs. However, keep in mind that if you have a landline phone for your home office, then it’s no deductible.
Almost all businesses operate with some form of insurance. Almost all forms of insurance are deductible. Here are just some of the options:
- Health insurance
- Business continuation insurance
- Property insurance
- Liability coverage
- Auto insurance
- Malpractice insurance
- Employee life insurance
- Workers compensation costs
Many businesses require lots of driving to and from clients. If you fall in this category, then it’s important to keep track of all the miles that you drive while on the clock.
Currently, the IRS will cover 0.58 cents per mile that you drive. As such, you can save a lot of money on these types of travel expenses.
Auto expenses aren’t the only type of transport deduction you can take advantage of. If your business requires you to travel a lot, then you can deduct things like airfare, lodging, and traffic.
The only caveat is that you must be away from your business for a full workday if you want it to count.
Things like paper, pens, boxes, ink, and staples might not seem that expensive. But, you can deduct them from your expenses. And, remember every drop in the bucket counts.
The same goes for office furniture. The IRS also considers this to be a type of office supply.
Advertising and Marketing
Do you advertise your business on billboards, the radio, television, podcasts, or the internet? If the answer is yes, then you can deduct these costs from your expenses.
The only caveat is that you must be able to prove that the costs are related to your business.
Meals and Entertainment
Many industries require you to entertain clients with a dinner and a show of some type. As long as this is necessary for your business, then you can deduct it.
Keep in mind that for meals you can only deduct 50% of the costs. However, if the meal is for an office party, then you can deduct 100% of the cost.
How Do You Claim Business Expense Tax Deductions?
Now that we know about some of the common types of business expenses you’re probably wondering how to begin claiming them. To do this you will need the Schedule C tax form.
This form is used to determine the amount of profit your business made that the government can tax. Once you fill out the Schedule C form, then you can report the profit on your personal 1040 form.
If you aren’t confident in your ability to correctly report your business expenses, then don’t panic. You aren’t alone. We recommend going with an accounting service that can help you prepare them.
If you need a recommendation, then look no further than Taxfyle
Want More Content? Keep Reading
We hope this article helped teach you about the different types of business expenses that you can deduct from your taxes. If you aren’t sure whether something counts as a business expense, then we recommend consulting a professional.
When dealing with the IRS it’s always better to be safe than sorry. Did you enjoy this article? If the answer is yes, then you’re in the right place. Keep reading to find more content that you’re sure to love.