Table of Contents
The IRS has a list of business expense categories that can be used for tax purposes. Filling out the 1040 form is one way to track your business expenses and see how much you owe in taxes. Depending on which category an expense falls into, it may or may not require payment via cash or credit card (or some other method).
It is hard to include every single company’s expenditure due to the enormous variety of sectors that exist. However, most businesses can benefit from a comprehensive list of common IRS business expense categories. Furthermore, automating the process of recording your company costs will guarantee that you do not overlook any tax deductions.
What Exactly Is a Business Expense Category?
A business expenditure category is a method of organizing costs for tax reasons. It’s critical to understand what types of costs are included or excluded from a category in order to apply the proper guidelines when deducting them on your tax return.
Rather than giving a comprehensive list of everything a company may deduct, the IRS has defined a business cost as one that meets two criteria:
- Involved in a business or trade: A business or trade must be profit-driven. Even if you never earn a profit, you must prepare for it and have the potential to do so. If the IRS believes you never meant to generate a profit, your company will be labeled a hobby and your costs will be disallowed.
- Ordinary and essential: “A usual cost is one that is typical and acceptable in your profession or industry,” according to the IRS. An essential cost is one that is beneficial to your profession or industry.”
IRS Pub 535: Company Expenditures is one of the most thorough publications on what business expenses are, the conditions that must be satisfied, and what is and is not deductible.
35 business expenses that are tax-deductible
As previously stated, it is difficult to account for every conceivable deductible business cost. However, we’ve compiled a list of the IRS’s most prevalent business spending categories. Below is a full explanation of what each business cost category entails, as well as how to qualify for the tax deduction.
1. Employee pay: You may deduct your workers’ gross earnings, salary, commission bonuses, and other forms of remuneration. This includes salaries given to a spouse or children as long as they worked for your company, the amount was reasonable, and the payments were made via payroll.
2. Employee education costs are deductible. Payments paid to workers for tuition, books, and other materials are deductible.
3. Employee benefits: Tax-deductible payments made on behalf of workers for the following programs:
- Health and accident Insurance
- Assistance with adoption
- Assistance with dependent care
- Life Insurance
4. Rent or lease payments are all tax-deductible, including payments for office space, equipment, a warehouse for inventory and supplies, and car leasing payments. The owner of a schedule C business (or lone proprietor) cannot rent property to a schedule C company (or sole proprietor). An S company (S-corp) or a C corporation (C-corp) may, however, rent property from its stockholders if the rent is reasonable.
Taxes paid to a lessor on leased office space, equipment, and cars used for company purposes are deductible business expenses.
6. Business interest on the debt for trade or business: Interest payments made on all loans, lines of credit, and other liabilities incurred for your trade or business are tax-deductible. Interest on an income tax debt, loans with respect to life insurance and interest on personal credit cards and loans are not deductible business expenses. Starting in 2018, there is a limitation on the maximum deductible interest expense, but the limitation only applies if your average annual gross receipts for the prior three years are greater than $25 million.
Payroll taxes are a deductible business expenditure if you pay them on behalf of your workers. This covers federal and state unemployment taxes, as well as Social Security and Medicare.
8. Excise taxes: You may be forced to pay excise taxes if you buy alcohol, tobacco, or gasoline for your company. The good news is that excise taxes are deductible on your tax return.
9. Personal property taxes are deductible if they are paid on company property. In this case, “personal” refers to property that may be removed from the company without causing damage, as opposed to real estate. Office furniture, machinery, and equipment are examples of personal property.
Premiums paid to safeguard your company from damage or theft are deductible business costs. This covers the following, but is not limited to:
- Hurricanes, earthquakes, and floods are examples of natural catastrophes.
- Bad debt in the business world
- Insurance against liability
- Malpractice
- Insurance for workers’ compensation
- Vehicles used for commercial purposes
11. Self-employed health Insurance: Payments for medical, dental, and eligible long-term care insurance for yourself, your spouse, and your dependents are tax-deductible if you are self-employed. Premiums are not deductible on Schedule C like other company expenditures, but rather as an adjustment to income on Form 1040, Schedule 1, line 16.
12. Business beginning and organizational costs: Business startup and organizational costs are deductible business expenditures. You may deduct up to $5,000 for starting expenditures and $5,000 for organizational changes in the first year. Any sum more than $5,000 may be spread out over 15 years.
13. Bad business debts: If you use the accrual basis of accounting, you record income as soon as a service is provided, and the customer owes you money. If you are later unable to collect from the customer, you can deduct the amount as a bad debt in the business world. Businesses using the cash basis of accounting don’t record income until the cash is received, so they never have bad debts.
14. Employee travel, meals, and accommodation: Reimbursements to workers for business trip travel, meals, and lodging are deductible.
15. Advertising and marketing expenditures: Advertising and marketing expenses are deductible company expenses. Business cards, pamphlets, websites, and fees paid to businesses like Constant Contact to send promotional emails are all examples of this.
16. Car expenses: If you use your vehicle for business, you may deduct the percentage that is used for business rather than personal use. You may utilize a regular mileage rate or subtract a part of vehicle-related expenditures such as petrol, maintenance, car washes, and parking and tolls.
17. Charitable donations: A firm may deduct charitable contributions up to 50% of the owner’s adjusted gross income. However, be sure you follow the following rules:
- You must acquire a letter from the organization detailing the amount of the gift and whether you got any goods or services in return for the donation if it is $250 or more.
- Volunteer services are not deductible; however, expenditures paid while helping, such as materials bought, are deductible.
- Volunteering-related mileage is deductible at 14 cents per mile in 2019.
- Donations of money, goods, or services are tax-deductible.
18. Membership dues and fees: Dues paid to your chamber of commerce and other professional/trade organizations are deductible business expenditures. Keep in mind that the following costs aren’t tax-deductible:
- Country clubs
- Golf and athletics clubs
- Sporting organizations
19. Fees paid to obtain a franchise, trademark, or trade name are tax-deductible business costs.
20. Allowances for interview costs: Any payments made on behalf of a potential employee during the interview process are business expenses that may be deducted. This covers out-of-town candidates’ travel expenditures, such as flights and hotel, as well as parking fees and other expenses. Meals may also be deducted up to 50% of the cost.
Payments to attorneys, certified public accountants (CPAs), financial planners, and other professionals for your business are deductible business expenses.
22. Tax preparation fees: You can deduct the fees you pay a tax preparer to prepare your tax return. If you prepare your own taxes with TurboTax, the cost of the software and the cost of e-filing your federal and state returns are both deductible business expenses.
23. Company licenses, liquor licenses, real estate agent licenses, and other permits necessary for your profession or business are all tax-deductible business costs.
Penalties and penalties are deductible if they are paid for late or non-performance of a contract. However, even if they are business-related, penalties and fines for breaching the law, such as speeding or submitting a tax return late, are not deductible.
25. Office repairs: Minor office repairs, such as painting and plumbing leaks, are company costs that may be deducted. Major repairs, on the other hand, must be capitalized and depreciated in order to raise the property’s worth. Replace a roof or heating, ventilation, and air conditioning (HVAC) system, for example.
26. Subscriptions: Magazine and journal subscriptions relevant to your company are tax-deductible. Subscriptions to personal magazines are not tax-deductible.
27. Supplies and materials: You may deduct supplies and materials used in your company. This covers the following, but is not limited to:
- Paper
- Notepads, pens, and pencils
- janitorial supplies
- Manuals and books
28. Utilities: Payments for your office space’s electricity, telephone, and gas are all deductible business expenses.
29. Telephone: Monthly telephone service fees paid in a commercial office space are tax-deductible. You cannot deduct the basic telephone service prices and taxes for the first line in your house if you operate a home office. Any additional telephone lines installed for commercial usage, on the other hand, are deductible business costs.
30. Depreciable assets: Purchases of furniture, equipment, and machinery must typically be depreciated over the expected life of the asset. Most small firms, on the other hand, will be able to deduct 100 percent of furniture, equipment, and machinery acquired between 2018 and 2022 using bonus depreciation or Section 179.
31. Payments to 1099 contractors: Payments to independent contractors who provide your firm with goods and services are tax-deductible.
32. Home office: You may deduct $5 per square foot of office space, up to a maximum of 300 square feet, if you have a home office. You may deduct a part of your real household expenditures depending on the proportion of time you spend working from home if you wish. This covers the following, but is not limited to:
- Utilities
- Taxes on property
- Insurance
- Mortgage interest is tax-deductible.
33. Client gifts: For each client present you buy, you may deduct up to $25. This may include purchases of gift cards, gift baskets, and other products.
34. Continuing education: As part of your trade or business’s continuing education credits, you may deduct expenditures for registration fees and materials for seminars and courses that you and your workers attend.
35. Contributions to 401(k) plans: Contributions to employee 401(k) plans are tax-deductible.
Frequently Asked Questions (FAQs)
What expenses may be deducted as a company expense?
While the IRS provides some guidelines and a thorough list of typical deductible business costs, it is impossible to provide you with a full list of all deductible company expenses. In general, you may write off a cost as a business expense if it is usual and required for you to do business.
What expenses can’t be deducted as a company expense?
Anything that is viewed or might be perceived as a personal cost cannot be written off as a company expense, according to a solid rule of thumb. Furthermore, the following costs are never deductible:
- Fines and penalties for breaking the law
- Bribes and other illegal payments
- Even if it is related to business, such as entertaining a customer, entertainment is fun.
- Dues at a country club
Conclusion
Now that you’ve got a handy checklist with the most common IRS business expense categories, a brief description, and the tax form to fill out, it’s time to figure out how you’ll keep track of your expenses throughout the year.
