Profit is always great. Until it’s time to file your taxes.
Come January, last year’s profit can feel less of an achievement and more like a burden which will now be used to calculate an intimidating amount of tax due.
If you’re like most business owners, you’re probably looking for a way to whittle your profits down to minimize your taxes, and you’re hopefully looking to do it honestly through business deductions.
But which expenses are deductible and which aren’t? Today we’ll look at some of the most common expenses to find out.
We’ve even organized these deductible business expenses in a free spreadsheet, and included links to a couple of other spreadsheets you might find useful.
What business expense categories are deductible?
Typically, if you spend money on ‘ordinary and necessary’ business expenses, that cost will be deductible.
This means the money you spent on parking, inventory and insurance products related to your business are deductible. So is the mileage you drove outside of your regular daily commute, and the cash you forked over for website hosting fees and SSL certificates.
There are things you won’t be able to deduct. Mileage for any regular commute that last longer than 30 days. Country club memberships. Legal fees and settlements related to sexual harassment NDAs.
But by and large, if you spent money to build, operate or grow your business, you should check to see if it’s tax-deductible.
What business expense categories should I be using in my accounting software?
The expense categories you use will vary widely depending on your field.
However, we’ve put together some of the biggest and most common expense categories in this free spreadsheet for deductible business expenses.
If you use these categories in conjunction with your accounting software throughout the year, you’ll have a much easier time calculating your deductions come tax season.
- Also see: default Business Expense Categories included in Tiller Money’s automated Small Business Spreadsheet
- And the Business Expense Categories List spreadsheet from FitSmallBusiness.com
How to use Business Expense Categories List Spreadsheet
Open this spreadsheet with a list of tax deduction categories.
In the “Filtered Deductions” sheet, you’ll be able to use the drop-down menu to explore potential expense categories. Once you’ve selected a category, examples of deductible expenses will pop up in the blue field.
If you have a specific expense you’re looking for, hop over to the “Searchable list of deductible business expenses” sheet. While this is not an exhaustive list of expenses, a quick Ctrl+F search will help you see if the deduction you’re seeking is a common one.
Examples of Deductible Business Expenses
Bear in mind that this list of deductible business expenses is not all-inclusive. You may have a qualified expense that does not appear below.
Conversely, an expense may appear below, but you may not be able to claim it because of your business structure or method of accounting.
You can get more details on business deductions straight from the IRS.
Broadly speaking, any direct compensation you provide to your employees can be counted under this category. Nuances will apply, which you should discuss with a CPA.
Examples of expenses that fall under Employee’s Pay include:
- Regular wages and salaries
- Bonuses and other award pay
- Gifts of nominal value (think small holiday gifts for employees)
- Employee educational expenses paid through a qualified educational assistance program
- 50% of what you paid for employee meals
- 100% of what you paid for employee lodging
- Employee benefit plans
- Life insurance premiums paid for employees — as long as you’re not a beneficiary
- Welfare benefit funds established for your employees
- Loans or advances issued to your employees
- Property issued to employees as compensation
- Outplacement services
Rent expenses can include:
- Rent for your business
- The deductible portion of your residential rent if you have a home office
- Taxes paid on leased property
- Costs paid to third parties in pursuit of your lease
- Depreciation of improvements you make to any properties as a lessee
Believe it or not, you may be able to deduct interest on business credit cards assuming you only charged business-related expenses.
Other deductible expenses in the Interest category include:
- Mortgage interest on business properties
- Expenses incurred to secure that mortgage
- Any prepayment penalties on your mortgage
- Interest on employment tax deficiency
- Original issue discounts
- Interest paid on business debt not owed to the IRS
- Interest paid on installment loans taken out for business purposes
Only select taxes can be deducted as business expenses.
They can include:
- State and local taxes
- Employment taxes
- The portion of self-employment taxes that would traditionally be paid by an employer
- Unemployment fund taxes
- Most excise taxes
- Franchise taxes
- Sales tax paid to other businesses
- Occupational taxes
- Personal property taxes on property you use for business purposes
Some insurance deductions will go right on your Schedule C. Others, like the self-employed health insurance deduction, will go on your Schedule 1.
Here are some big potential insurance deductions to keep an eye on:
- Premiums on insurance policies taken out to protect your business from fire, theft, accidents, etc
- Premiums for credit insurance covering bad business debts
- Costs of group hospitalization/medical insurance for employees
- Costs of long-term care insurance for employees
- Premiums for liability insurance for your business
- Premiums for malpractice insurance
- Workers comp insurance
- Overhead disability policy premiums
- The portion of your auto insurance premium that is proportionate to your business use of the vehicle
- Business interruption insurance premiums
- Health insurance premiums for some self-employed individuals
Depending on your industry, you may qualify for one of these deductions the IRS takes particular note of in Publication 535:
- Costs of R&D
- Carrying charges
- Intangible drilling costs
- Exploration costs
- Circulation costs
- Startup/organizational costs
- Reforestation costs
- Retired asset removal costs
- Barrier removal costs
- Film and television production costs
- Repair and maintenance costs
It costs money to set up and maintain a business. You can deduct those costs as they apply across the following areas:
- Filing fees
- Legal fees
- Accounting fees
If you own the site of a natural resource, you may not even have to work in the field to claim depletion. Here are some properties you can own and claim depletion:
- Depletion on oil and gas wells
- Depletion on natural gas wells
- Depletion on mines and geothermal deposits
- Timber depletion
Business Bad Debts
No that’s not a grammatical error. Business bad debts tend to be debts you carry over from another business venture, but they can also be debts you cosigned on or loans your business issued to others:
- Debts from a former business
- Business debts from a decedent
- Debts remaining from a liquidation
- Loans to clients and suppliers
- Business loan guarantee gone bad
Advertising is a large umbrella. In today’s day and age, advertising includes all the digital marketing you do to make your business visible.
Advertising costs can include:
- Print ads
- Online ads
- Business cards
- Website hosting and maintenance costs
- Costs of website design
For some businesses, travel is essential to provide services, obtain training or secure new contracts. When you take a business trip or send your employees to do the same, you may be able to claim:
- Per diem or real expenses for lodging
- Per diem or real expenses for meals and incidentals, generally at 50%
- Car allowances
- Mileage for non-commuter business miles
- Airfare for business travel
- Cost of cabs and/or car services during business travel
Whether you’re traveling across the country or across the street, educational events can be deductible in many cases. Formal education can be deductible, too.
- Professional development training that provides CEUs or industry equivalent credit
- Professional development training that improves your skills in the current field
- Professional development training for your employees
- Travel associated with accessing said training
- Employee educational expenses paid through a qualified educational assistance program (You may be able to claim this for yourself if you are self-employed.)
Who among us does not have a million software programs helping us keep our business afloat?
Here are some examples of software you may claim if you use it for your business. Subscription software technically has to be claimed differently than a product you only pay for once.
- Microsoft Office
Utilities – including communications deductions – are deductible when they are used for your business. If you are claiming a home office deduction, a portion of your residential utilities may be deductible, as well.
- Electric bill for your place of business
- Gas bill for your place of business
- Communications bills for your place of business, including internet bills and cell phone bills
We might live in the digital age, but I’m willing to be you’ve bought at least one book of stamps or pack of paperclips since you started your business!
Typical office supplies are generally deductible, on top of shipping costs and supplies that you may need in order to perform your job.
- Office supplies such as pens, paper, ink, etc.
- Supplies you need to complete your work specific to your profession
- Costs of shipping
- Costs of shipping-related products such as boxes, tape, and other packaging
Common Expenses You Can’t Deduct
Just because you can deduct a lot of things doesn’t mean you can deduct everything. Here are some common expenses you might be surprised to learn aren’t deductible.
Even when you purchase clothing for work, it isn’t usually deductible. The idea is that the super cute dress you wear into the office could just as justifiably be worn on the weekend. Regular clothing is versatile, able to be used outside of work and is therefore not deductible.
There is an exception, though. If the clothing is part of a uniform or costume which is required to do your job, you may be able to claim it. If there’s no way you’d wear it in the course of a normal day outside the office because it would be obviously socially inappropriate to do so, you may have a claim.
The miles you drive as a part of your regular commute.
If you’re on a job for more than 30 days and it’s a part of your regular commute, you cannot deduct the miles you drive to and from the office.
That’s most of the miles for most people. But if you have an agency job where you’re itinerant and work on short-term contracts, those miles can be claimed.
Another profession where you could claim miles is delivery driving. You couldn’t deduct the miles you drove to and from the place of business, but you could deduct each mile driven from the place of business to each delivery.
Lunch with Co-Workers
Unless you’re on an out-of-town business trip, you can’t deduct that meal with your co-workers. Not even at the 50% rate.
Professional Accreditation Fees
You can deduct the cost for training that build your skills, build your CEO bank or count towards a degree related to your field.
But you cannot deduct the costs of professional accreditation fees. If you’re a lawyer, you could not deduct the cost of taking the Bar. If you’re a CFP, you can’t deduct the costs to sit for the test.
Deductions aren’t free money
Remember that whether an expense ends up being deductible or not, claiming business expenses on your taxes doesn’t mean they’re free.
When you claim a deduction on your taxes, it lowers your gross income. Then, when it’s time to calculate how much you owe, you will be taxed a specific percentage for every dollar of that gross income.
Just because you lower your gross income by $100 doesn’t mean your tax due will be $100 lower. In fact, dollars that fall in the 22% tax bracket would only yield $22 in tax savings. In this example, you’re still out $78, so that training or software subscription or whatever you purchased for your business still has to be worth the money.
Business taxes can be complicated. It’s easier if you use a spreadsheet track your expenses throughout the year, but if you’re still feeling overwhelmed, reach out to a CPA.