As a small-business owner, you are probably on a tight budget despite the many expenses that continually pile-up. Fortunately, many of your business expenses are tax-deductible. If you are wondering what qualifies as a tax-deductible business expense, don’t wait until doing your taxes to find out. Read on now to discover which of your business expenses can be deducted from your small business tax return.
What Qualifies as an Allowable Business Expense?
General business expenses refer to money spent or costs incurred while operating a business. To deduct an expense, the Internal Revenue Service (IRS) states that the item must be ordinary to your industry, and the expense must be necessary to run your business.
The IRS allows 100% small business tax deductions for many of your general expenses. These expenses can include:
- Rent paid for office space
- Employee wages
- Lease payments on warehouse space
- Fuel cost
- Utility payments
- Equipment maintenance
What Is Not an Allowable Expense?
Some expenses will not be deductible, because they are not considered ordinary or necessary for your business, or they are already claimed in another tax filing. These non-deductible expenses include:
- Cost of Goods Sold: because you already deduct this from your gross receipts to find your gross yearly profit, you cannot deduct COGS again as a business expense.
- Capital assets: this involves paying significant expenses over a long period, and a business expense is something entirely used up within one year.
- Personal expenses: these expenses are unrelated to your business and business expenses, and so cannot be deducted.
If you buy something that you use for your business and your personal life, you may be able to divide the expense. For instance, the cost of entertaining a client may be ordinary and necessary for your business, but that expense is only 50% deductible. Another example would be if you buy a cell phone on which half of your calls are personal, but half are for your business. In this instance, you can consider the cell phone a partial business expense and deduct 50% of the cost.
Direct and Indirect Business Expenses
Direct business expenses are explicitly related to producing the goods or services you sell. These expenses are often 100% deductible and include things like raw materials and wages.
Indirect expenses are costs that help you operate your business. These expenses would include rent and utilities for your business, and they are deductible based on a percentage. When you run your business from home, indirect expenses are a large factor. Your small business accountant can calculate the deductible percentage by comparing your home’s total square footage to the amount of space you use for business in your home.
Record, Record, Record
To make your tax return process easy, you must record all expenses. If you don’t have documentation of your business expenses, they cannot be deducted. If you are unsure if your expense is deductible, retain the receipt and contact a small business accounting professional for assistance.
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