The IRS allows self-employed people and business owners to deduct expenses needed to run their business from their taxes. To be deductible, the expense must be considered ordinary, necessary, and reasonable in order to conduct business operations. The expense must be common, useful, and accepted standard industry practice in order to be deductible.
Which Business Expenses Can Be Deducted?
There are three categories of deductions accepted by the IRS: the cost of goods sold, the business’ capital expenses, and personal expenses needed to run the business. Items can be deducted only in one category. You cannot, for example, claim the same expense as a capital business expense and a personal expense.To determine the costs of goods sold, the expenses related to storage, labor, raw materials, factory costs should be included.
The following items are likely to be deductible for many taxpayers.
- Vehicle: If you have expenses related to a vehicle needed to conduct business operations, the expense of the car and resulting costs can sometimes be deducted as a business expense.
- Mileage: Mileage related to business travel can be deducted as a business expense.
- Home Office: There are specific rules for what qualifies as a home office. It must be a separate room of your house in which business is routinely conducted and not used for any other purpose.
- Utility Bills: If your home office qualifies, you can often deduct portions of your utility bills. The formula uses the square footage of the overall residence as 100%. If your home office is, for example, 25% of the square footage of the home, you might be able to deduct 25% of related utility bills.
- Supplies: Office supplies are deductible as business expenses.
- Equipment: Routine items such as staplers and pens can be deducted, as can computers, software, and printing devices.
- Cell phone: Cell phone bills and cell phones are considered a legitimate business expense.
- Travel: Travel that is for a legitimate business purpose can be deducted, as can all related expenses.
- Meals: Meals purchased during work trips and business travel can be deducted.
- Miscellaneous Deductions
Which Expenses Are Not Deductible?
Living expenses, charitable contributions, political contributions, property repair or renovation, lobbying costs, government fines, or business dues paid to social clubs are not deductible as business expenses.
Do I Need a Lawyer?
Tax law is known to be complex and the penalties for incorrect reporting can be costly and even severe. A tax attorney can advise you of your best options in filing and addressing potential audit risks.