Understanding business tax deductions

What is a business tax deduction?

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A business tax deduction (or business tax write-off) is an expense that you can deduct from your taxable income. You subtract the amount of the business tax deduction from your income, making your taxable income lower. The lower your taxable income, the lower your tax bill.

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What can you deduct for business?

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According to the Internal Revenue Service (IRS), 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 business. An expense does not have to be indispensable to be considered necessary.

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Staying on top of your business tax deductions

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Many business owners struggle to stay on top of their tax deductions during the year and instead try to piece together their books at year end. This method (or lack thereof) often results in inaccurate financials, missed tax deductions and missed tax savings.

That's where bookkeeping comes in

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To deduct your business expenses, you will need to keep accurate records and stay on top of your bookkeeping. Timely bookkeeping (ideally weekly or monthly) is critical to help you keep track of your deductions. If you are not happy with your current process, check out Taxceed. We will do your bookkeeping for you.

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When Taxceed does your bookkeeping, we catch these deductions throughout the year so you have confidence your books are accurate, you have included every business deduction and you are maximizing your tax savings.

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Tax deductions for your business

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The IRS provides comprehensive guidance on common business expenses and rules for what is and is not deductible. Although certain business expenses are specific to the type of business you run, we put together a list of common business tax deductions for business owners.

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• Advertising
• Depreciation
• Employees' pay
• Gifts
• Home office
• Insurance
• Interest
• Internet
• Legal and professional fees
• Meals
• Qualified business income (QBI)
• Rent
• Supplies and materials
• Taxes
• Telephones
• Travel
• Utilities
• Vehicles

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Advertising

Business owners can generally deduct reasonable advertising expenses that are directly related to your business activities. You cannot generally deduct amounts paid to influence political legislation (e.g., lobbying expenses).

Percentage deductible: 100%

Example deductions:

• Advertising costs paid to promote your business, products or services.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

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Depreciation

Business owners can generally deduct most types of tangible property (buildings, machinery, vehicles, furniture, equipment, etc.) through depreciation. You cannot depreciate the cost of land.

Percentage deductible: 100% (over the useful life of the property)

Example deductions:

• Rental property purchased
• Vehicle purchased to use for business purposes

To qualify:

• It must be property you own.
• It must be used in your business or an income producing activity.
• It must have a determinable useful life.
• It must be expected to last more than one year.

Qualifications defined:

• Ownership: To claim depreciation, you must usually be the owner of the property. You are considered as owning property even if it is subject to a debt.
• Business or income-producing activity: To claim depreciation on property, the income produced from the property must be taxable. You cannot depreciate property that you use solely for personal activities.
• Determinable useful life: To be depreciable, your property must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes.
• Lasting more than one year: To be depreciable, property must have a useful life that extends substantially beyond the year you place it in service.
• Land: You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up.

Supporting documents should include:

• Description of the property
• Date placed in service
• Cost or other basis
• Business / Investment use %
• Depreciation details (prior years depreciation, method, etc.)

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Employees' pay

Business owners can generally deduct the amount you pay your employees for the services they perform. The pay may be in cash, property or services. It may include wages, salaries, benefits, commissions or other non-cash compensation.

Percentage deductible: 100%

Example deductions:

• Pay for regular wages or salary.
• Bonuses paid as additional pay for services.

To qualify:

• Pay must be reasonable
• Pay must be for services performed

Qualifications defined:

• Reasonableness: You must be able to prove that the pay is reasonable based on the circumstances that existed when you contracted for the services.
• For services performed: You must be able to prove the payment was made for services actually performed.

Supporting documents should include:

• Amounts and dates of all payments
• Name, address, social security number and occupation of each employee
• Dates of employment
• Dates and amounts of employee tax deposits you made

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Gifts

Business owners can generally deduct all or part of the cost of business gifts.

Percentage deductible: 100% (up to $25 per person)

Example deductions:

• Gifts given to customers to thank them for their business.

To qualify:

• You can deduct no more than $25 for business gifts you give directly or indirectly to each person during the tax year.

Qualifications defined:

• Indirect business gift: A gift to a company that is intended for the eventual personal use or benefit of a particular person is considered an indirect gift to that particular person who will receive the gift.

Supporting documents should include:

• Cost of the gift
• Date of the gift
• Description of the gift

Home office

Business owners can generally deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

Percentage deductible: 100% (Of the percentage of the home devoted to business use)

Example deductions:

• You use an extra room in your home regularly and exclusively to run your business.

To qualify:

• The business part of your home must be used exclusively and regularly for your business.
• The home must generally be your principal place of business.

Qualifications defined:

• Exclusive: You must use a specific area of your home only for business.
• Regular: You must use a specific area of your home for business on a regular basis.
• Principal place of business: You both use the office i) exclusively and regularly for administrative and management activities of your business and ii) you have no other fixed location where you conduct substantial administrative or management activities for your business.

Supporting documents should include:

• You do not have to use a particular method of recordkeeping, but you must keep records that provide the information needed to figure your deductions for the business use of your home. You should keep receipts and other evidence of expenses you paid.

Insurance

Business owners can generally deduct the ordinary and necessary cost of insurance as a business expense.

Percentage deductible: 100%

Example deductions:

• Premiums paid for business insurance (liability, health, vehicle, life, etc.)

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Interest

Business owners can generally deduct interest expense charged for the use of money you borrowed for business activities.

Percentage deductible: 100% (limited to a maximum deduction of 30% of taxable income per tax year)

Example deductions:

• Interest payments made for a business loan or business line of credit.
• Interest payments made for business credit card debt.

To qualify:

• You are legally liable for the business debt.
• Both you and the lender intend for the business debt to be repaid.
• You and the lender have a true debtor-creditor relationship.

Qualifications defined:

• You cannot deduct interest that must be capitalized.
• You generally cannot deduct personal interest.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Internet

Business owners can generally deduct the cost of internet expenses related to business.

Percentage deductible: 100%

Example deductions:

• Internet service plan costs
• Domain registration fees

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Legal and professional fees

Business owners can generally deduct fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business.

Percentage deductible: 100%

Example deductions:

• Fees paid to an accountant for bookkeeping or preparing your business tax returns.
• Fees paid to an attorney for legal services related to your business.

Qualifications defined:

• Legal fees paid to acquire business assets are generally not deductible. These costs are added to the basis of the property.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the services received that shows the amount was for a business expense

Meals

Business owners can generally deduct 50% of the cost of business meals if you (or an employee of the business) are present and the food or beverages are not considered lavish or extravagant. Additionally, there are certain meals that are 100% deductible, like providing food and drinks for a company-wide party or to your community.

Percentage deductible: 50%

• Business meals while traveling away from home
• Business meals with clients or employees

Example deductions:

• Meals while traveling away from home (whether eating alone or with others) on business.
• Meals at a business meeting or business convention.

Percentage deductible: 100%

• Meals provided for company-wide parties
• Meals provided to the general public

Example deductions:

• Meals at a company holiday party or a summer picnic.
• Meals at a company sponsored community event.

To qualify:

• You or an employee of the business must be present.
• The expense cannot be lavish or extravagant.

Qualifications defined:

• Lavish or extravagant: The meal expense must be reasonable based on the facts and circumstances. An expense is not considered lavish or extravagant merely because it is more than a fixed dollar amount or because the meal takes place at a deluxe restaurant.

Supporting documents should include:

• Name and location of the restaurant
• Number of people served
• Date incurred
• Amount of the expense
• Business purpose of the expense

Qualified business income (QBI)

Business owners (sole proprietorships, partnerships, S corporations, trusts and estates) may be eligible to deduct up 20 percent of their qualified business income (QBI).

Percentage deductible: 100% (Up to 20% of QBI)

To qualify:

• Income must be earned from a domestic business operating as a sole proprietorship, a partnership, S corporation, trust or estate. Income earned through a C corporation or by providing services as an employee are not eligible for the deduction.
• The net amount of qualified items of income, gain, deduction and loss from any qualified business. QBI is subject to limitations, depending on the business owner’s taxable income and amount of W-2 wages paid by the qualified business.

Supporting documents should include:

• Bank deposit information (cash and credit sales)
• Invoices
• Receipts
• 1099 forms

Rent

Business owners can generally deduct rent expense if the rent is paid for property you use in your business but do not own.

Percentage deductible: 100%

Example deductions:

• Lease of a property or building for business.
• Lease for the business use of your home or car.

To qualify:

• If you have or will receive equity in or title to the property, the rent is not deductible.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Supplies and materials

Business owners can generally deduct the cost of supplies and materials used for business.

Percentage deductible: 100%

Example deductions:

• Cost of business supplies and materials

To qualify:

• Cost of supplies and materials must be consumed and used during the tax year deducted.

Qualifications defined:

• If the usefulness of the supplies and materials extend substantially beyond the year they are placed in service, you must generally recover their costs through depreciation.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the item purchased that shows the amount was for a business expense

Taxes

Business owners can generally deduct various federal, state, local and foreign taxes directly attributable to your business.

Percentage deductible: 100%

Example deductions:

• State and local taxes on real estate.
• State and local income taxes imposed on the business.
• Employment taxes (federal and state income taxes, social security and medicare taxes) paid to employees.

Qualifications defined:

• You cannot deduct your businesses federal income taxes, estate and gift taxes, or state inheritance taxes.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the taxes paid

Telephones

Business owners can generally deduct the cost of telephone expenses related to business.

Percentage deductible: 100%

Example deductions:

• Mobile phone and service plan costs for business
• Telephone service line at your place of business (outside of your home)
• Second telephone service line in your home (if used exclusively for business)

Qualifications defined:

• You cannot deduct the cost of your first telephone service line (except for long-distance business calls) in your home, even if you have an office in your home. The cost of a second line into your home used exclusively for business is deductible.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Travel

Business owners can generally deduct ordinary and necessary expenses when traveling outside of your tax home for business.

Percentage deductible: 100%

Example deductions:

• Transportation between: i) your home and your business destination, ii) the airport / station and your hotel; iii) the hotel and the work location or business meeting place.
• Lodging, meals, vehicle costs and other ordinary and necessary expenses related to your business travel.

To qualify:

• Your travel must be away from the city or general area that is your tax home.

Qualifications defined:

• Traveling away from home: Your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.
• Tax home: Your tax home is generally your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.

Supporting documents should include:

• Cost of each separate expense for travel, lodging and meals
• Dates you left and returned for each trip and number of days spent on business
• Destination or area of your travel (name of city, town or other designation)
• Business purpose for the expense or the business benefit gained or expected to be gained

Utilities

Business owners can generally deduct the cost of utility expenses related to business.

Percentage deductible: 100%

Example deductions:

• Cost of heat, lights, power, water and sewage related to your business.

Supporting documents should include:

• Payee name
• Amount paid and proof of payment
• Date incurred
• Description of the purchase that shows the amount was for a business expense

Vehicles

Business owners can generally deduct the cost of operating a car, truck or other vehicle for business.

Percentage deductible: 100%

Example deductions:

• Cost of your vehicle used for business activities.

Supporting documents should include:

• Cost of the care and any improvements
• Date you started using it for business
• Mileage for each business use and total miles for the year
• Date of the use of the vehicle
• Business destination
• Business purpose for the expense

Tax support for your business

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Tax deductions are essential tools to reduce your taxable income and save you money. Additionally, good recordkeeping and accurate books will ensure your deductions are reported correctly according to the tax laws. If you need help or have a business tax question not answered by this article, connect with Taxceed.

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Taxceed is a CPA firm based in Washington, D.C. Our mission is to help entreprenuers and business owners achieve long-term success. The firm provides online bookkeeping, accounting, tax services and expert financial advice to businesses.