This is often one of the first questions my clients ask. As your CPA, I’m always researching the rules & regulations that would benefit you most on your return. However, as a small business owner myself, I’ve developed a few easy pointers here to provide some clarity and ease some stress surrounding this issue.
One perk of running your own business is, of course, tax deductions! Yes, we still have taxes to pay at the end of the year on profit, which is an anxiety-inducing thought to some, but that’s why it is even more important to take advantage of the allowed deductions. That way you can lower your tax liability as much as possible. This is a question I get a lot, so it will only help you as a business owner to be informed. Ok, let’s dive in.
You can deduct the operating costs of running your business on either your business (partnership, corporation) or personal income tax return (Sole proprietor or LLC). To be deductible, the IRS says the expense “must be both ordinary and necessary,” which simply means the expense is common & helpful in your line of work. What is ordinary and necessary can sometimes be a gray area and can depend upon your specific industry, but there are general deductions that most businesses share. Look for these in bold below.
Communication:
How do you communicate with your clients or create content or provide services for them in this virtual age? Phone, Internet, website, web hosting, and software programs like Zoom & Loom are all deductible business expenses.
Cost of Goods Sold:
A.k.a. COGS. Maybe you create and/or manage merchandise for eventual sale to your customers? The COGS formula is: Beginning inventory + Purchases – Ending inventory, and it’s deductible. If you don’t have an inventory, usually you have some sort of job supplies that you use in your business instead.
Investments:
Assets & small equipment purchased for use in your trade or business can be deducted for tax. Assets (> $2,500) such as machinery, office furniture and computer equipment, as well as buildings and related improvements are typically depreciated a little bit each year over their useful life. However, certain assets qualify for “section 179 deduction” or “bonus depreciation” - in which case they can be immediately expended in full or in part which could provide greater benefits vs. slower depreciation methods. As is usually the case, there are plenty of specific rules on this. Another to mention for investments - if you have a loan or a note payable, the interest payments may be deductible.
Location / workspace:
Do clients come to your office, where you pay office rent as well as utilities? Alternatively, maybe you have a home office. The home office deduction is calculated based upon the square footage of your office in relation to your entire home. If you rent a home, part of your rent may be deductible. If you own your home, you will be able to deduct your direct home office expenses, such as furnishings, as well as a percentage of the indirect expenses, such as your home’s utilities, insurance and repairs & maintenance if your home office qualifies under the IRS’s rules. To qualify, the business part of your home must be exclusively and regularly used for business as well as your principal place for conducting administrative & management activities for your business. There are always exceptions so be sure and check with your CPA. And no matter where your office is, office supplies, postage & shipping and software are also deductible.
Travel:
Do you use your personal or business vehicle to travel to client locations or other business-related outings & meetings? Parking & toll fees are deductible, and you may be able to take a deduction for your vehicle. Actual auto expenses such as repairs & maintenance, deprecation, gas and lease payments may be deducted, or you can expense an amount based on your mileage and the current year’s standard mileage rate (65.5 cents per mile for 2023). If you are planning to expense your mileage, make sure you keep records of your travel throughout the year. You will need to know your mileage, the dates of your business trips, where you drove to and the business purpose of your trip. If you travel frequently for business, there are apps that might be worth adding to your tools to make tracking your mileage less of a chore (MileIQ & Everlance are two that come highly recommended). The cost of the app would also be a deduction. There are some circumstances where deducting mileage is not permitted, so check with your CPA. Additionally, travel expenses include costs such as airline flights & fees, Uber & Lyft, meals on the road and hotel stay – as long as there is a legitimate business reason for your travel, and again, it is “ordinary & necessary.”
Meals & Business promotions:
Entertainment expenses, such as entertaining at night clubs, theaters and country clubs, are no longer tax deductible after the Tax Cuts and Jobs Act. The Consolidated Appropriations Act of 2021 allows a full deduction for business meals in tax years 2021 & 2022, but reverts back to a fifty percent deduction for 2023. Some business owners provide gifts for their clients, which are typically deductible up to $25 per client-recipient. Money spent for promoting your business is generally deductible.
Marketing/Networking:
How do you reach your clients or potential customers? These days it’s more than just business cards. Whether through Google Ads, Facebook or print, advertisements and related expenses to prepare those ads, such as app costs or printing or product photo shoots are deductible. Similarly, memberships to groups that build your professional knowledge & network would also be a business expense. Just make sure it’s not only for pleasure or social purposes, such as a country club or golf club.
Professional:
Costs to seek professional advice & services, for example, from lawyers & CPAs is deductible. Maybe you hired a business coach to help you grow your sales, a bookkeeper to help track all of your expenses, and a CPA for your business’ yearly tax preparation! All deductible.
Investing in yourself:
Always a good idea - for yourself AND your business! Continuing education, business seminars, dues & subscriptions related to your industry would be deductible.
Comes with the territory:
Liability and other types of insurance, bank fees, licenses & permits are all usually ordinary & necessary, although unexciting, business expenses. Yes, some business expenses can be exciting! See: investing in yourself.
Employees/Contractors:
If your business has employees, then payroll, payroll taxes & fringe benefits can be deductible, as well as payroll processing services if it is not done in house. Health insurance can be a worthy deduction, especially for self-employed business owners – but there are specific rules to qualify, one being that you must show a profit for the year. If you use independent contractors, their fees are deductible as well. Just make sure you file 1099 paperwork for them at the end of the year, if required. If allowable, certain retirement account contributions can also be a valuable deduction.
What can’t I deduct?
A few things that are NOT business deductions allowed for tax purposes are charitable contributions (although these are deductible on your personal return - check with your CPA for the rules), country clubs or hotel clubs etc., penalties & fines paid to a government agency, political contributions, and of course personal living expenses.
In summary
I hope this has given you a good, general idea of what expenses are deductible for your business. There are usually always exceptions to the rule, and the rules can be complex & vary by industry, so it’s important to check with your CPA who can help determine what’s appropriate for your unique situation.
Running a business comes with its share of expenses so it’s a great idea to have an adequate record-keeping system. I also can’t stress enough how important it is to keep accurate books to manage your expenses and cashflow, as well as improve the value of your company.
Any questions or clarifications, please don’t hesitate to ask! To see a sample listing of common business expenses, click here.
Katie Hardie, CPA is the owner of Hardie CPA and a member of the American Institute of Certified Public Accountants. She has a full range of experience as a CPA - including tax, bookkeeping & audit. Her experience spans both public and private accounting. Her passion is helping small businesses & individuals with tax & accounting needs. Katie seeks to empower small-business owners in the area of bookkeeping & tax so that they can stay on track, focus on their bottom line and grow their business. She works virtually and can be reached at katie@hardiecpa.com or click here to fill out a contact form.
Hardie CPA provides the information in this article for general guidance only. It is not intended to nor does it constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.