How to Deduct Business Expenses

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1Identifying Business Deductions

2Calculating Your Business Expenses

3Completing Your Taxes

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If you own your own business, then you can deduct any expense that is ordinary and necessary for your business. If you don’t own the business, then you can deduct any business expense that is not covered by your employer. For example, if you join a trade organization, then you can deduct the membership fee as a business expense. Other expenses, such as for meals or travel, are less clear-cut. Tax law is unfortunately very complex, and you would benefit from consulting with an accountant or other tax professional. Hold onto your receipts and schedule an appointment with an accountant so that you can deduct as much as possible and reduce your tax burden.

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Part 1

Part 1 of 3:

Identifying Business Deductions

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   Save your receipts. As best as you can, you should save your receipts for all business expenses. Although receipts are not absolutely necessary, they are the best way to prove an expense. You should also write helpful notes on the receipt, including the name, title, and company of the client you entertained and the date, location, cost, and purpose of the expenditure. For example, if you take a client out to dinner, then you should make a notation on the back of the receipt that you talked about business, since this is a requirement for claiming a meal deduction.

   • Get a big folder and throw your receipts into the folder. This way, you will have everything in one place when you sit down to do your taxes.
   • If you want to be more organized, then you can create a running spreadsheet and enter business expenses weekly or daily. You should still hold onto your receipts.
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   Check if an expense was “ordinary” for your business. You can claim a business expense for almost anything; however, the expense must be “ordinary” for your trade or business. “Ordinary” means “normal, common, and accepted under the circumstances by the business community.”

   • For example, purchasing office supplies and paying for postage are ordinary costs incurred for most businesses.
   • However, purchasing a yacht and branding it with your business name does not count as an "ordinary" expense.
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   Ask if the expense was “necessary.” The expense must also have been necessary for the conduct of your trade or business. This does not mean that the expense was “indispensable.” However, it must be helpful and appropriate for your business.

   • For example, joining a trade association would be a deductible expense. Membership in an association would be helpful and appropriate for your business.
   • However, joining a private club that has nothing to do with your trade or business would not be a “necessary” expense.
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   Identify capital assets. If you acquired an asset that will benefit your business for more than one year (for instance, a vehicle, computer, office furniture), then this is considered a capital asset and cannot be expensed. This can be tricky, as this can change on a case by case basis. Depending on how it is used, an item could be a capital asset for one business and a deductible expense to a different business. Or, for instance, a repair on an item might be considered a deductible expense, while an improvement to that same item might be considered a capital asset. Work closely with your accountant to determine which items are capital assets and which are deductibles.

   • Capital assets can be amortized (if they are intangible) or depreciated (if they are tangible); however, and you can count the value by which the asset has amortized or depreciated as an expense.
   • If you are unsure if an asset is considered a capital expenditure, you and your accountant should refer to the IRS, which has classified some categories of common capital expenditures.
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   Identify common business expenses. There are many common business expenses which you can claim. For example, you could claim the following:

   • Contributions to retirement plans. This includes contributions to your own plan as well as to your employees’ plans.
   • Employee compensation. Generally, you can deduct the amount you pay your employees.
   • Insurance. You can generally deduct for the necessary and ordinary costs of insurance if it is for your profession, trade, or business. For example, liability insurance, medical insurance for employees, malpractice insurance, and credit insurance are all deductible.
   • Rent. You can deduct rent if you use the property for your trade or business. You can’t deduct if you have, or will receive, equity in or the title to the property.
   • Taxes. You can deduct various foreign, federal, state, and local taxes if they are directly attributable to your business.
   • Fees. Franchise royalties and fees are deductible. Franchise fees must be amortized (deducted) over 15 years.
   • Other. See IRS Publication 535 for more details.
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Part 2

Part 2 of 3:

Calculating Your Business Expenses

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   Separate out personal expenses. You cannot take deductions for personal, family, or living expenses. However, some expenses might be split. In this situation, you can claim as a business expense the portion that was used for business purposes.

   • For example, you might have taken out a $5,000 loan. If you used $1,000 for a family trip but $4,000 for your business, then you can take the $4,000 as a business deduction. However, remember that this $4,000 is deductible only if it is used for allowable expenses in the business.
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   Calculate your home office deductions. You can take a home office deduction, but only if you use a dedicated portion of your house exclusively and regularly for business. You cannot claim your living room sofa is a “home office” if you also lie there to watch television. Your home office must also be your principal place of business. You have two options for calculating your home office deduction:

   • You can use the simple method. Multiply the number of square footage of your office by $5. You cannot claim more than 300 square feet. You may also claim home-related itemized deductions.
   • Alternately, you might calculate the actual costs of the home office. This requires that you calculate the percentage of your home devoted to business use. You can then deduct a percentage of mortgage interest, insurance, utilities, repairs, and depreciation.
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   Calculate the deduction for your automobile. If you use your automobile for both personal and business purposes, then you can deduct the percentage used for business. You have two ways of calculating your deduction:

   • Standard mileage rate. For example, if the mileage rate for 2016 business use of your car is 0.54 cents per mile, then calculate the number of miles you drove for business purposes and multiply this number by the mileage rate.
   • You could instead calculate your actual car expenses, which include oil, gas, tolls, parking fees, registration fees, lease payments, insurance, and other expenses. However, many people find that the mileage method provides a higher deduction. Compare the two and use the highest number.
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   Determine how much of your travel expenses are deductible. As with other types of deductions, you can only deduct the portion of your travel expenses related directly to business activities. All of your transportation expenses, like the flight, car rental, taxis, baggage fees, and any other tips or fees related to transportation can be deducted as long as you are traveling directly between business or lodging locations. You can also deduct 50 percent of the cost of meals and entertaining while away from home. Any other activities you pay for while traveling that are not directly related to business activities cannot be deducted.
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   Calculate the amount you can deduct for entertaining clients. You can deduct for meals with clients, as well as for other entertainment. You may deduct 50 percent of the cost of meals while you are at your home location (not traveling). There are many limitations and exceptions, such as:

   • The main purpose of the meal or entertainment must have been to conduct business and you did conduct business, but you do not have to provide proof of profit from these activities. Alternately, the entertainment must be associated with your business and take place before or after a business discussion.
   • The 50 percent covers taxes and tips, as well as cover charges to get into a club. However, the cost of transportation to and from the entertainment is not subject to the 50 percent limit.
   • The 50 percent is intended to represent the cost of the client's meal. In some cases, the deduction may be higher. For example, workers who are covered under the department of transportation’s “hours of service” limits may deduct up to 80%. This includes air transportation workers, interstate truck and bus drivers, certain railroad employees, and certain merchant mariners.
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   Read IRS publications if you have questions. Many deductions fall into gray areas. For example, you can claim an automobile business expense for some travel but not all. You can’t deduct for your morning commute from your home to your office. However, you could deduct for transportation expenses if your home is your principal place of business and you go between your residence and another work location, like a client's home or business.

   • IRS Publication 463 describes in detail travel, entertainment, gift, and car expenses. You should consult this publication if you have questions about whether an expense qualifies as a business deduction.
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Part 3

Part 3 of 3:

Completing Your Taxes

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   Claim deductions on Schedule C. If you are a sole proprietor or the sole owner of an LLC, you can claim your business deductions on Schedule C (Form 1040). You are also responsible for any self-employment tax from the net income of your company, but you may deduct half of this tax as a business expense. For example, you can claim deductions for the following on this schedule:

   • Advertising
   • Car or truck expenses
   • Contract labor
   • Insurance
   • Interest
   • Legal and professional services
   • Office expenses
   • Pension and profit sharing
   • Rent
   • Supplies
   • Taxes
   • Travel, meals, and entertainment
   • Wages
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   Report deductions on Form 1120. Corporations fill out a different tax form. They should claim their deductions on Form 1120. You can report the following deductions on this form:

   • Compensation of officers
   • Salaries and wages
   • Bad debts
   • Rents
   • Taxes and licenses
   • Interest
   • Charitable contributions
   • Advertising
   • Pensions and profit-sharing plans
   • Employee benefit programs
   • Other deductions
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   Get professional help, if needed. You don’t have to complete your taxes on your own. You can also seek out the help of qualified tax professionals who can look at your business expenses and tally up your business deductions for you.

   • To find a certified public accountant, you should contact your state’s Society of Certified Professional Accountants. You can find your state’s Society online.
   • Look for a “Find a CPA” link on the website. The Society might have a list of CPAs you can browse or there may be a number to call for a referral.
   • You can also ask for referrals from other business owners. Ask them if they would recommend their accountant.
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Tips

• Be especially careful trying to deduct for expenses involving family. The IRS pays close attention if you try to deduct payments made to a family member or to a business in which a family member has an ownership stake. If you do business with family, then thoroughly document what you received in return from the family member. Also, keep in mind that their compensation must be equivalent to their skills and responsibilities. You must also make some special considerations regarding what to withhold and pay in employment taxes of family members.
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