Deducting Business Expenses

by Simplice Essou, CPA | November 30, 2022

In this article we will discuss common business expenses that are deductible and a few that most taxpayers do not always think about when it comes to business expenses.

What is deductible?

According to the IRS: “The general rules for deducting business expenses: A business expense must be both ordinary and necessary to be deductible. 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.”

In other words, any expense that is necessary to produce business income is deductible if it is ordinary according to industry practices.

The following expenses are deductible:

Cost of Goods Sold

A manufacturing entity or a retailer that maintains inventory for resale can deduct the cost of goods sold. This cost is calculated by taking the inventory at the beginning of the year, adding the purchases throughout the year and subtracting the end of year inventory.

Salaries and Benefits

A business with employees can deduct the expenses associated with salaries and benefits.

Work-Related Travel Expenses

Expenses incurred for travel for business are deductible. These expenses include airfare, hotels, car rental, food and tips.

Work-Related Car Use

A business can deduct business-related car expenses. Business owners can choose between the mileage method and the actual cost method. On July 1, 2022, the IRS increase the mileage rate from 58.5 cents per mile to 62.5 cents per mile.

Business Insurance

Business insurance is a deductible expense. If the business owner has a home office or uses a portion of the home for business, renter’s insurance costs are deductible as business home office write -offs.

Home Office Expense

Business owners often overlook home office expenses. To qualify for a home office deduction, the space used as a work area must be exclusively for business and it has to be use regularly as the principal place for conducting business. Business owners may choose one of the two following methods to determine the deduction amount:

1. The new method called the Simplified method is pretty straightforward. Under this method owners can deduct $5 per square foot for up to 300 square feet. Therefore, the maximum deduction under the Simplified method is $1,500.
2. Under the Regular method the calculation considers the ratio of the area used for the business in relation to the square footage of the whole home. This percentage is then applied to the expenses such as rent, interest on the mortgage, and utilities.

Other deductible expenses include expenses for telephone, computer and Internet access, office expenses, and health insurance, just to list a few.

Depreciation

The tax laws allow businesses to depreciate the cost of assets over the life of the assets. For example office furniture can be depreciated over seven years (their useful life) and autos can be depreciated over five years. Therefore, every year the business can deduct a fifth of the cost of the vehicle as depreciation expense. This can result in substantial tax savings.

Another tax saving strategy is to use Section 179 of the tax code that allows for the one-time depreciation of a qualified asset if it is put into service before December 31. For example, a business owner can purchase a piece of equipment for $50,000. If it is purchased and put into service prior to the end of the year, the whole $50,000 can be deducted instead of being deducted over seven years. This strategy can result in substantial tax savings in years where revenue is high.

By keeping good records and knowing what expenses are deductible the business can help reduce their tax bills and keep more money in the business.