"Don't worry. It's a write-off."
You've probably heard this before. You've probably thought this before. You probably have, at least, a pretty good idea of what business expenses can be deducted on your tax return and what expenses can't. But do you know exactly what the IRS accepts and what it doesn't?
Especially in small, family-owned businesses, the line between business and personal expenses can become blurred. This article should clear everything up for you.
What expenses are suitable for deduction?
According to the IRS, a business expense must be both ordinary and necessary to become eligible for a deduction.
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. Keep in mind that an expense does not have to be indispensable in order to be considered necessary.
You cannot deduct personal, living or family expenses. However, if you purchase something and use it both personally and for your business, you can get a partial deduction. For example, if your cell phone gets 70% business use and 30% personal use, you can deduct 70% of the cost as a business expense.
Great. What can I actually write off?
Cost of Goods Sold. If your business manufactures products, or purchashes products for resale, you must value your total inventory at the beginning and end of each year. Then, the cost of goods sold is deducted from your gross revenue to determine your profit for the year.
Capital Expenses. Business start-up costs, business assets and business improvement costs are all considered capital expenses. You can deduct or amortize certain business start-up costs, but otherwise you would capitalize these costs rather than deduct them.
Personal Expenses. We just covered this with the example of the cell phone bill. You usually cannot deduct personal, living or family expenses unless those expenses are used in part for business purposes.
You can also deduct business expenses from your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.
The same goes for your car. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
Other Business Expenses. Here are the largest and most common business expense deductions...
- Employee pay - All salaries and wages.
- Retirement plans - The cost to the business of providing these plans to the entire company.
- Rent - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
- Interest - On any money you borrwed for business purposes.
- Taxes - You can deduct various federal, state, local, and foreign taxes.
- Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession (like worker's comp).
Note: This is not an inclusive list of business expense deductions. For a complete list, check out Publication 535 from the IRS on Business Deductions.
Also, if you have any questions about deducting business expenses, please get in touch with us. Someone from our team is happy to speak with you.