As an entrepreneur, it may seem like sometimes you can never get a break – and the annual taxes just seems to add to the headache. However, tax season doesn’t always have to be a pity party. The reality is that there are a multitude of IRS resources available to entrepreneurs and individuals alike.
One of the many redeeming qualities of owning your own business is that many expenses can be deducted, capitalized or amortized. You, preferably with the help of a knowledgeable accountant, just have to apply them. Below, you’ll find a few deductions to keep in mind as the business incurs expenses.
*This list is not exhaustive and is merely meant to alert you to a few of the possible deductions that may be applicable to your business. Please check out the IRS publication 535 for complete details on these deductions.
Resources: Publication 535, Business Expenses
Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. The following are examples of allowable business deductions:
- Business use of your home (must be proportional)
- Business use of your car (note: commuting to work does not qualify as a business expense)
- Employee’s pay including wages, salaries, bonuses, and commissions (must be reasonable and paid or incurred for the services performed).
- Rent or lease payments for property you use in your trade or business. (note: If you have or will receive equity in or title to the property, the rent is not deductible)
- Interest you pay or accrue during the tax year on debts related to your trade or business. Note you must be legally liable for that debt, intend that the debt be repaid, and be in a true debtor creditor relationship with your lender.
- 50% of reimbursement to employees for food, travel, and entertainment during course of business. Note: the reimbursement must be for ordinary and necessary expenses incurred while carrying on your trade or business.
- Business bad debt: You have a bad debt if you cannot collect money owed to you. Generally, a business bad debt is one that comes from operating your trade or business.
- Advertising expenses. You generally can deduct reasonable advertising expenses that are directly related to your business activities.
- Credit card convenience fees. Credit card companies charge a fee to businesses who accept their cards. This fee when paid or incurred by the business can be deducted as a business expense.
- Education expenses of your employees. Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible.
While there are numerous business deductions, there are also costs of running a business that are not deductible but instead may be capitalized or amortized.
These three main categories include: 1) expenses used to figure cost of goods sold; 2) capital expenses; 3) personal expenses. The expenses used to figure cost of goods sold and capital expenses must generally be capitalized as opposed to being deducted. For example, the costs of going into business, the cost of long-term business assets, and improvements to those assets are examples of expenses that should generally be capitalized, not deducted.
Here are a few other helpful resources provided by the IRS
- Publication 15 (Circular E), Employer’s Tax Guide: This publication explains your tax responsibilities as an employer.
- Publication 583, Starting a Business and Keeping Records: This publication provides basic federal tax information for people who are starting a business. It also provides information on keeping records and illustrates a recordkeeping system.
- Small Business Health Care Tax Credit and the SHOP Marketplace: This publication provides information on receiving a tax credit for your employees healthcare.
- Leasing a car for your business: The publication provides more detail on leasing a care for your business.