Common Business Expenses You Should Be Maximizing
As a business owner, there are a wide variety of tax deductions available to help reduce your taxable income and lower your overall tax liability. These deductions apply to many different types of businesses, whether you're a sole proprietor, partnership, S-Corp, or C-Corp. Below are some of the most common and valuable tax deductions that business owners can take advantage of:
1. Business Operating Expenses
These are the costs required to run your business on a daily basis and are typically deductible as long as they are ordinary and necessary.
Rent or Lease Payments: If you rent office space, a storefront, or any other location for your business, the cost of rent is fully deductible.
Utilities: Costs for electricity, water, heating, internet, phone lines, and other utilities necessary for business operations.
Office Supplies: Items such as pens, paper, printer ink, and other office materials used for day-to-day operations.
Business Insurance: Premiums for business insurance, including general liability, workers' compensation, professional liability, and other business-related insurance policies.
2. Employee Wages and Salaries
Salaries and Wages: Compensation paid to employees, including bonuses and commissions, is fully deductible as a business expense.
Employee Benefits: Contributions to employee retirement plans (e.g., 401(k)), health insurance premiums, and other benefits like life insurance, dental, and vision plans.
Contract Labor: If you hire independent contractors or freelancers, payments to them are deductible. Remember to report these payments on Form 1099-NEC if you pay them $600 or more during the year.
3. Depreciation
Depreciation of Assets: The cost of large assets that provide value over several years, such as equipment, vehicles, furniture, computers, and real estate, can be deducted over time through depreciation.
Section 179 Deduction: You may be able to immediately expense the cost of qualifying equipment, software, or property under Section 179, up to certain limits. This allows for accelerated deductions and can result in significant tax savings in the year of purchase.
Bonus Depreciation: If you're buying new or used business property, you may be able to apply bonus depreciation to immediately deduct a large portion of the purchase price in the first year, subject to certain rules.
4. Business Travel Expenses
If you travel for business, many of your travel expenses are deductible:
Transportation: Airfare, trains, buses, rental cars, and other travel costs related to business trips.
Lodging: Hotel stays or other accommodations while traveling for business purposes.
Meals: Meals while traveling for business are generally 50% deductible, and in some cases, 100% deductible.
Vehicle Expenses: If you use your personal car for business, you can deduct mileage, or you can deduct actual expenses like gas, repairs, and maintenance. Make sure to keep good records to separate personal and business use.
5. Home Office Deduction
If you use part of your home exclusively and regularly for business, you can deduct a portion of your home expenses, including:
Mortgage Interest or Rent: A percentage of your mortgage or rent based on the square footage of your office relative to the total home size.
Utilities: A portion of your electricity, heating, water, and internet bills.
Property Taxes and Insurance: A percentage of your property taxes and homeowners insurance premiums based on your office’s size.
Home Office Supplies: Desk, chair, and other equipment used exclusively for business purposes.
There are two ways to calculate the home office deduction:
Simplified Method: $5 per square foot of home office space, up to a maximum of 300 square feet (for a maximum deduction of $1,500).
Regular Method: A percentage of your actual home expenses (mortgage interest, utilities, property taxes, etc.).
6. Interest on Business Loans
Loan Interest: The interest you pay on loans used for business purposes, such as equipment financing, business lines of credit, or real estate loans, is deductible.
Credit Card Interest: If you use business credit cards for legitimate business expenses, the interest charges are also deductible.
Remember, only the interest portion of the loan is deductible, while principal paydown is not.
Note: Personal loan interest is generally not deductible unless the loan was used for business purposes.
7. Marketing and Advertising Expenses
Advertising Costs: Whether you're paying for digital ads, print ads, TV commercials, or promoting your business through direct mail or flyers, the costs are deductible.
Website Costs: Fees related to building, hosting, and maintaining your website are fully deductible.
Public Relations and Social Media: Costs for promoting your business via PR campaigns, influencer marketing, and social media advertising.
8. Professional Services and Fees
Accounting and Legal Fees: Fees paid to accountants, tax professionals, or business consultants for services related to running your business are deductible.
Marketing, Advertising, and Public Relations Firms: If you pay for professional services related to promoting your business, those fees are deductible.
Software Subscriptions: If you use software to run your business (accounting software, CRM tools, project management software, etc.), those costs are deductible.
9. Education and Training
Workshops and Seminars: Expenses for business-related training, workshops, and seminars are deductible if they improve or maintain your skills for your current business activities.
Online Courses: Fees for online courses or business-related certifications (such as marketing or project management training) are deductible.
Books and Subscriptions: Expenses for books, trade publications, and educational subscriptions that are directly related to your business are deductible.
10. Meals and Entertainment
Meals with Clients: Meals related to business meetings or discussions with clients or customers are 50% deductible (sometimes 100%, depending on circumstances).
Business Entertainment: While the IRS has limited entertainment deductions (such as tickets to sporting events), some business-related entertainment expenses may still be deductible when associated with a business purpose, like meals and travel. Generally speaking though, entertainment expenses are no longer deductible.
11. Bad Debts
If your business has made sales on credit or loans and you’re unable to collect on those amounts, you can write off bad debts. This only applies to businesses that use accrual accounting (i.e., businesses that record income when earned and expenses when incurred, rather than when money changes hands). Most small businesses operate using cash accounting, so bad debts would not be deductible since the product sales or services provided were never counted as income (because you never received the money).
12. Retirement Contributions
Retirement Plans: Contributions made to employee retirement plans (like a 401(k) or a Simple IRA) are deductible. If you are self-employed, you may be eligible for a Solo 401(k), SEP IRA, or other retirement plan options with higher contribution limits than standard IRAs.
Self-Employed Retirement Contributions: If you're self-employed, you can deduct contributions to your own retirement account, such as a SEP IRA or Solo 401(k), to reduce taxable income.
13. Health Insurance and Medical Expenses
Health Insurance Premiums: Self-employed individuals can deduct health insurance premiums for themselves, their spouses, and dependents, which can reduce taxable income.
Health Savings Accounts (HSA): Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
Qualified Long-Term Care Insurance: Premiums for long-term care insurance are deductible as a business expense for self-employed individuals.
14. Start-Up Costs
Business Start-Up Expenses: You can deduct up to $5,000 in start-up costs in the year you begin your business (if your total start-up costs are under $50,000). These can include market research, advertising, business incorporation costs, and professional fees related to setting up your business.
Amortization: Any costs exceeding $5,000 can be amortized over 15 years.
15. Vehicle Expenses
Business Vehicle Use: If you use your personal car for business purposes, you can deduct vehicle-related expenses such as gas, repairs, insurance, and depreciation. You can choose between two methods for deducting vehicle expenses:
Standard Mileage Rate: Deduct a set rate per mile (for 2024, it's $0.67 per mile).
Actual Expense Method: Deduct the actual costs of operating your vehicle, such as gas, maintenance, and insurance, along with depreciation if applicable.
The Bottom Line
The tax code provides a wide array of deductions for business owners, allowing you to reduce your taxable income and pay less in taxes. However, it’s important to keep detailed records, receipts, and documentation to substantiate your deductions. Be sure to consult with a tax professional or accountant who can help you navigate the complexities of business tax deductions and ensure you're taking full advantage of the opportunities available to you.