While earning an income, it is obvious that self-employed individuals are to bear some Business Expenses. However, it is possible to deduct most costs, dollar for dollar. If the costs are fully deductible, then you can free to subtract a dollar. In your business or trade, costs can be considered as deductions in case they are necessary and ‘ordinary’. You can avail yourself of tax breaks for making non-deductible expenses.
‘Necessary, Ordinary’ expenses
‘Ordinary’ as per IRS means these are paid commonly by other taxpayers in your line of trade, business. ‘Necessary’ on the other hand means the money spent helps you to carry out your business. Without such expenditures, it will not be possible to perform business and make profits.
Commonly deducted Business Expenses
- Advertising
- Accounting fees
- Sales costs / commissions
- Bank charges
- Contract labor costs
- Ongoing professional education costs
- Consultation expenses
- Factory expenses
- Equipment rentals
- Employee benefit programs
- Subscriptions, dues
- Delivery charges
- Collection fees, credit
- Interest paid
- Insurance
- Licenses
- Legal fees
- Laundry
- Hosting, domain names, internet subscriptions
- Postage
- Profit-sharing, pension plans
- Office supplies, cost
- Repairs, maintenance
- Rent
- Promotion
- Professional fees
- Professional training, development fees
- Copying, printing expenses
- Telephone
- Supplies
- Software
- Small equipment, tools
- Security
- Compensation, wages, salaries
- Utilities
- Travel
- Trade discounts
Gifts to clients, customers
Even if deemed necessary or ordinary, not all Business Expenses are considered to be fully deductible. It also includes gifts given to clients or customers. Only a particular percentage can be claimed of these costs. On a $100 gift, the deductible is about $25/person. The remaining amount of $75 needs is your non-deductible expense. But if you give a gift under $25, then it is possible to deduct the entire expense. This is because it is under the specified limit. Hence, you need to make wise decisions if you are a small entrepreneur.
Promotional gifts
When tax is concerned, not all gifts can be considered as gifts. A few of them are categorized as promotional items. It generally includes items that cost around $4 or even less. If you imprint your business name on it and distribute them, then it is fully deductible.
Entertainment, meals expenses
Entertainment costs incurred by businesses were once deductible by around 50%. But no more! This tax code was eliminated in 2018 with the introduction of the TCJA (Tax Cuts & Jobs Act).
But if clients are taken out individually to dinner, business meals are deductible by 50%. But this should involve some business dealing and should not be over-the-top extravagant.
Transportation, automobile expenses
Part of transportation, automobile expenses are deductible equivalent to the driven miles. But it should be during the taxable year and for business purposes only. However, it will not include travel costs incurred on visiting another location or city. It is another subject and fully deductible. While doing business, you are likely to incur transportation costs daily. Personal miles should be separated from business miles. Hence, you need to maintain a log.
Actual expenses vs. standard mileage rate
You can make a choice. As per IRS, you can either deduct 58 cents/mile standard mileage rate or actual costs incurred while driving these miles. But in 2020, it dropped to about 57.5 cents. There are some annual changes made to standard mileage rates, as it gets indexed for inflation.
Knowing what is deductible on your Business Expenses will allow you to be on the safe side of the law.
