What Expenses Are Deductible By My Business?

Business owners are allowed to take deductions for expenses incurred in running the business. In determining whether something is a deductible expense, here are the things that the IRS considers to be important.

Is It An Ordinary and Necessary Expense?

The IRS offers the following explanation of a business deduction. The IRS states:

"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary."

If a deduction falls into one of these three categories, it is likely to be allowed:

1. The expense helps you get clients or customers, involves office space, furniture, decor, computers, marketing, contracts, training, and other infrastructure.
2. It is directly related to the process of earning revenue such as supplies, cost of good sold, employee costs, client management systems, shipping costs and other expenses used when services or products are purchased.
3. Involves administrative costs such as accounting, banking, record keeping, payroll costs and other activities that occur after revenue is earned.

Here are some examples of expenses that are ordinary and necessary:

• Advertising

• Bank Service Charges

• Credit Card Processing Fees

• Insurance

• Commissions

• Conferences

• Dues & Subscriptions

• Equipment rental

• Permits & Licenses

• Contract Labor

• Accounting Fees

• Legal Fees

• Consulting Fees

• Repairs & Maintenance

• Security Expense

• Salaries & Wages

• Taxes (payroll taxes, property taxes, and other local taxes).

• Pension & Profit-Sharing Expense

• Payroll Processing Fees

• Meals & Entertainment (deduction is limited to 50% and must have business purpose)

• Office Supplies

• Training & Seminars

• Printing & Reproduction

• Postage & Delivery

• Telephone & Communications

• Rent

• Utilities

What Are Non-Deductible Business Expenses

Some expenses incurred by a business are not deductible. Examples of non-deductible expenses include bribes, lobbying costs, penalties, fines, and contributions made to political parties and candidates.

Could It Be Considered Personal & Not Deductible?

The IRS further provides that personal expenses are not allowed as business deductions:

"Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part."

Generally personal expenses are going to be your home costs, commute to work, grooming, personal clothing, personal medical, self-care activities or anything that maintains your lifestyle, health or mental health.

When an item such as a phone, printer or computer is going to be used for personal and for business both, you can allocate it between personal and business and deduct the business portion. You can determine an allocation by tracking your usage for a period, if your usage will be consistent over time, or by keeping a log as evidence for the deduction. This is like how we keep a mileage log to deduct car expenses. For example, if you use your phone for personal and business, and after tracking it for a period determine your phone is used 55% for business, you can deduct 55% of the cost.

Conclusion

If you are looking at your business expenses and wondering whether some of your business expenses are properly classified, send us a message. We will happily walk you through the process of establishing what is and is not a business expense as it applies to your business.