The cost of running a business can add up quickly, especially as your company grows. Fortunately, the IRS allows you to deduct business expenses to reduce your taxable income and save on your taxes.
There are several tax deductions available for business owners, from travel expenses to depreciation. To minimize your tax bill, it’s important to know which deductions you qualify for.
Whether you’re filing your business taxes for the first time or you simply want to ensure you’re taking advantage of all tax savings available to you, use this guide to learn the basics of business expense deductions.
Key takeaways
- The IRS allows deductions for ordinary and necessary business expenses like office supplies, rent, and employee wages.
- Some expenses are fully deductible, while others, like meals, are only partially deductible.
- Keep detailed records of your expenses to aid in filing your tax return and in case of an audit.
What are business expenses?
Business expenses are defined by the IRS as ordinary and necessary costs paid or incurred during the taxable year in carrying on a trade or business. This means that personal and family expenses don’t qualify for business expense deductions.
Understanding how the IRS defines ordinary and necessary is an essential part of making sure you’re only claiming deductions you’re eligible for.
Business expenses as defined by the IRS
The IRS defines an ordinary expense as one that’s common and accepted in your industry. For example, office supplies would be considered an ordinary expense for an office space.
Necessary expenses include any expenses that are helpful and appropriate for your trade or business. For example, the wages or salaries you pay to your employees are necessary expenses because your employees play a key role in business operations.
There are many specific rules about what you can and can’t deduct. You can’t claim a deduction for the cost of commuting between your residence and place of business. However, you may be able to claim a deduction for the cost of traveling from one place of business to another.
Fully vs partially deductible business expenses
Your business tax checklist should include a list of all the business expense deductions you’re eligible for. Depending on the expense, you may be able to partially deduct that cost or write off the expense in its entirety.
Some examples of fully deductible business expenses include:
- Advertising and marketing expenses
- Certain legal fees
- Insurance costs
- Interest paid (may be limited)
- Office lease costs
- Wages paid to employees
Certain types of expenses are only partially deductible. For example, meals may be limited to 50% of the cost. You still record the full meal expense against your profit and loss, but it will be reduced by 50% when you file your taxes and claim the deduction.
Meals that are deductible at 100% are limited to company-wide parties, meals provided to employees at work for the purposes of continuing working hours, or meals provided as taxable compensation to employees.
The interest expense on business loans that are partially used for personal expenses is also only partially deductible.
In summary, in order for an expense to be fully deductible, it must be a necessary and ordinary business expense that isn’t related to any family or personal expense.
List of deductible business expenses
As a business owner, understanding which tax deductions you qualify for can save you money. Here’s a list of deductible business expenses according to the IRS:
1. Home office
If you use an area of your home on an ongoing basis and exclusively for your trade or business, you may be eligible for the home office deduction. To qualify for this deduction, your home must be your principal place of business, and you can’t use that part of your home for any other purpose. Home expenses that can be allocated to the home office deduction include:
- Utilities
- Maintenance and repairs
- Insurance
- Property taxes and interest
- Depreciation
2. Rent
You can also claim a tax deduction for rent you pay in the commercial building where your business operates, including but not limited to:
- Office buildings
- Retail spaces
- Warehouses
You can deduct the rent you paid to occupy a building for the tax year. Additionally, you can deduct up to 12 months of prepaid rent, as long as the payment covers 12 months or less and does not extend beyond December 31 of the following tax year.
3. Employee compensation
Several types of employee compensation can be deducted, including:
- Salaries
- Bonuses
- Wages
- Payroll taxes
- Awards
- Fringe benefits
You can also write off certain qualified benefits, like group-term life insurance and educational assistance.
4. Automobiles
When you drive to visit clients and vendors or travel to business meetings, you can deduct costs associated with your vehicle. You have the choice between the standard mileage deduction or deducting the actual amount you paid for:
- Gas
- Maintenance
- Insurance
- Registration
- Repairs
5. Insurance
Insurance expenses are deductible as long as they’re considered ordinary and necessary. This includes several types of insurance, such as:
- Casualty and theft insurance
- Professional liability or malpractice insurance
- Insurance for business vehicles
- Accident insurance
- Health insurance for employees
6. Taxes
Taxes on business property, real estate taxes, and excise taxes can be deducted on your business tax return.
7. Legal and professional fees
Any fees you paid to a professional like an attorney or accountant can be deducted on your tax return if they’re related to your business. If you started your business this year, you can deduct up to $5,000 in business start-up expenses and another $5,000 in organizational expenses for that first year.
8. Travel, meals, and entertainment
As long as these expenses are considered business-related, they could be eligible for a deduction. For example, you may be able to deduct:
- Transportation
- Rental cars
- Tolls and parking
- Meals
- Overnight lodging
As of 2018, entertainment expenses generally are no longer deductible.
9. Retirement and pension plans
Various types of pension plans, including SEP plans and SIMPLE IRA plans, are eligible for tax deductions. If you’re contributing to one of these employee pension plans, you may be able to deduct your contributions.
For SEP plans, you can deduct the lesser of your contributions or 25% compensation. For SIMPLE IRA plans, you may be able to deduct the entirety of your contribution.
10. Bad debts
It’s not uncommon for invoices to go unpaid, but that doesn’t mean you’re out of luck. You may be able to claim a business bad debt deduction if the following conditions are met:
- You previously included the unpaid amount in your business income.
- The debt is directly related to your trade or business.
- You made a reasonable effort to collect the debt before claiming the deduction.
11. Interest
If you took out a loan for your business during the tax year, you may be eligible for a deduction based on the interest you paid. Generally, you deduct the interest you pay during the tax year on business-related debts, including loans for business equipment and your business credit card. However, Section 163 may limit the deduction for business interest expense for businesses with average annual gross receipts above $29 million for 2024 tax year.
12. Depreciation
You can use depreciation to spread out the deduction over the life of an asset. Things like heavy machinery that wear down over time can be depreciated if they’re used in business and expected to last more than one year.
13. Bonus depreciation
Instead of spreading deductions out over the expected life of a product, bonus depreciation allows you to take an accelerated deduction for depreciation. Currently, bonus depreciation is set to phase down each year until it expires in 2026.
14. Advertising expenses
Marketing your business is essential to finding new customers, but it can be costly. Fortunately, you can write off many of those expenses, such as:
- Online ads
- Print materials
- Promotional events
Keep in mind that you must meet specific criteria to qualify for these business tax deductions. If you’re not sure whether your expenses qualify as ordinary and necessary or business-related, a tax expert can help you make that determination.
Tips for saving on your small business taxes
When it comes to claiming deductions, keep these considerations in mind:
Understand how your business will be taxed
The type of business you operate affects how your business income is taxed and how much you owe at the end of the year. Consider talking to a tax expert about changing your business structure for tax purposes.
Hold onto records of expenses
Make claiming your deductions as smooth as possible by ensuring you’re keeping detailed records of any expenses you may be able to write off. When you file your taxes and claim deductions for various expenses, you’ll need to ensure you have the receipts to back it up.
Contribute to retirement
If you don’t currently have a retirement plan for yourself or your employees, now is a good time to start one. As an employer, you can deduct contributions you make to a qualified retirement plan up to a certain limit.
Take advantage of tax credits as well
While tax deductions allow you to reduce your taxable income, you may also qualify for tax credits. Tax credits are subtracted from the total you may owe, reducing your total tax bill and potentially resulting in a refund. You can claim both deductions and credits when you file.
Common mistakes and challenges in claiming business expense deductions
You’re eligible to claim certain tax deductions as a business owner, but there are several common challenges business owners face when it comes to claiming business expenses.
Separating personal and business expenses is one of the biggest obstacles. You may consider an expense business-related, but that doesn’t matter if the IRS classifies it as a personal expense. Understanding how ordinary and necessary expenses are defined can help.
You may also have trouble claiming various deductions if you didn’t keep thorough records. Generally speaking, you need receipts, canceled checks, or bills to deduct business expenses on your taxes.
Some expenses simply aren’t deductible, even if you think they should be. It’s important to distinguish between deductible and non-deductible expenses to make sure your tax return is accurate.
You may want to consider working with a tax professional to help you prepare and file your business taxes. A tax expert can help you determine what’s deductible so you can maximize your tax savings. With TurboTax Live Business, get unlimited expert help while you do your taxes, or let a tax expert file completely for you, start to finish. Get direct access to small business tax experts who are up to date with the latest federal, state and local taxes. Small business owners get access to unlimited, year-round advice and answers at no extra cost, maximize credits and deductions, and a 100% Accurate, Expert Approved guarantee.
