It’s guaranteed you’ll have to pay taxes on your business income. But the good news is that you have some control over how much you pay.
Savvy businesses plan their expenses to minimize their tax bill. Knowing how to squeeze every deduction out of your usual spending saves you money, but once you incorporate that knowledge into your strategy, you’ll take control over your taxes.
First, you need to know what tax deductible expenses are, how they work, and which common ones to take advantage of.
What is a tax-deductible business expense?
A business expense is a cost that comes with operating your business. Within that range of costs you will have deductible expenses—these are expenses which are eligible for tax deductions. It is important for all businesses to carefully keep track of their deductible expenses for tax purposes, but it’s even more critical for small businesses.
Over 50% of small business owners feel they are paying too much in taxes, and they’re probably right. Taking advantage of established deductible business expenses can save your business thousands or even tens of thousands of dollars every single year.
How do tax deductions work?
Tax deductions reduce your taxable income when you file come tax time.
For example, if you’ve calculated your taxable income to be $100,000 and you have $5,000 in tax deductions, your taxable income is reduced to $95,000. Your tax bill is then calculated on this reduced amount.
Every tax deductible expense is either 50% or 100% deductible.
A dollar spent on a 100% deductible expense creates a dollar in tax deductions. Comparatively, a 50% deductible expense would only create a fifty cent tax deduction.
What business expenses are deductible?
Tax-deductible business expenses are defined by the IRS as expenses that are both ordinary and necessary. According to the IRS:
- An ordinary expense is “common and accepted” in your trade, industry, or business.
- A necessary expense is “helpful or appropriate” for your trade, industry, or business.
A deductible business expense may fall under these two categories, ordinary or necessary, and are eligible to be deducted when you file yearly taxes. Deductible expenses are things you will already be purchasing or spending money on, but you can take advantage of these expenses for tax credits. These tax write-offs might be total, partial, or applied over time, and come in all forms of business expenses.
Although it can mean more careful tracking and more detailed tax filings, the financial benefits for your business can be immense. You will likely have questions—fortunately, the IRS offers additional information about how to go about deducting business expenses.
Here are a few of the most common areas for business expenses that are tax deductible:
Our list of common deductible business expenses
- Mileage and vehicle expenses
- Rent and utilities
- Marketing and advertising
- Employee pay and benefits
- Gifts
- Miscellaneous or general office expenses
- Charitable contributions
- Home office and other home expenses
- Software costs
- Business insurance
- Interest expenses
- Business meals
- Employee training and education
- Bank fees
- Legal and professional services
- Professional dues or subscriptions
- Depreciation
- Business travel
Mileage and vehicle expenses
You have two options for deducting mileage and vehicle costs from your taxes: the actual expenses method and the standard mileage method.
The Actual Expense Method
In some ways this method is more comprehensive, because it covers more aspects of the cost of travel. It can include gas refills, oil changes, insurance, and the cost of vehicle depreciation. The catch is that only a percentage of these costs can be deducted.
You can calculate this percentage with a simple formula: Just divide the number of miles you drove for business travel and divide it by the total number of miles you drove for the fiscal year.
Example
If you drove 20,000 miles in 2021, and 3,000 of those miles were for business trips, you would divide 3,000 by 20,000 to get 0.15, or 15%. This is the percentage of your vehicle that is used for business purposes, and you would be able to deduct 15% of the cost of car washes, repairs, and other necessary vehicle expenses.
The Standard Mileage Method
This method is more straightforward, and depending on your situation it may add up to a higher deduction. It is based entirely on the number of miles you drove for business purposes, and does not include other expenses such as insurance.
The IRS standard mileage rate for 2021 is 56 cents for every business mile driven. Logged miles can be claimed as a tax deduction when the employee travels for business trips or for local transportation for business purposes and requires reimbursements.
Example
If you drove 1,000 miles for business trips in 2021, you would multiply that amount by 0.56 to get a total of 560. This means you could deduct $560 for travel expenses.
Keep in mind that a daily commute does not count as a travel expense, and you’ll need to keep careful documentation of your business trips to make sure you’re filing your deductions correctly.
Rent & utilities
Are you paying rent on an office building, a storefront, or even a single room as part of your business? Then you can deduct that expense. Unfortunately, this does not apply to any rent-to-own properties. You can also deduct utilities for your working space, such as electricity and water bills.
Marketing and advertising
Everyone wants to promote their business, but marketing can be expensive. Luckily you can deduct any marketing and advertising expenses that are used to generate or keep customers. This includes online banner ads, websites, billboards, flyers, and more. However, marketing that is intended to influence legislation cannot be deducted.
Employee pay & benefits
The salary and benefits you pay your employees are tax-deductible expenses. This includes any bonuses and commissions.
The compensation must be reasonable: Others in these roles are getting paid similarly.
Sums must be paid out: You cannot claim deductions for payroll that has yet to be issued.
Special attention must be paid to business owner compensation: Not all business owner pay can be classified as a deduction. You must follow IRS guidelines when deducting business owner pay.
These rules are designed so business owners cannot take advantage of compensation that is being paid unfairly to employees or owners. There are additional stipulations from the IRS so be sure to research carefully before deducting.
Employee benefits are a huge cost to employers and vital to employees. As a business owner you can deduct health insurance, retirement plans, variations of life insurance, dependent care, employee discounts, and more. Keep track of the various business expenses you incur for employee benefits so you can maximize your benefit deductions at the end of the year.
Gifts
Random gift expenses are a minimal business deduction and cap out at $25 per person annually. You do not need to claim gifts given to clients if they are less than $4, widely given, and display the company logo (think low-cost company SWAG like pens).
General office expenses
Those low cost items like pens, paper, and staples might not seem like much, but they add up over the course of the tax year.
Don’t lose the tally of these expenses: every dollar spent on office supplies is tax deductible.
Charitable contributions
Charitable contributions can increase employee morale, improve workplace culture, and demonstrate your organization’s investment in your own community. If your business is donating to charity, it makes sense to deduct these expenses and receive the appropriate tax benefits.
Most charitable cash donations qualify for a deduction, with the exception of donations made to supporting organizations, charitable remainder trusts, and most private foundations. You also cannot carry forward donations from previous years, or deduct donations made to establish or maintain a donor-advised fund.
Home office and other home expenses
If part of your home is used exclusively for conducting business, and your home is your principal place of business, you may be able to deduct a portion of your home expenses. Some of these expenses can include a portion of mortgage interest, home insurance, utilities, and possibly even certain preparation materials (such as a fresh coat of paint) and repairs.
Software costs
A business’s tech stack is used to tackle tasks like payroll, customer relationship management, accounting, and marketing. And so long as the software is used solely for business purposes, it’s 100% tax deductible.
The next time you’re thinking of adding a new software subscription to your business (like BILL), remember that the cost will save you some dollars come tax season.
Business insurance
Various types of insurance are used by businesses to protect themselves from damages in their day-to-day operations. These insurance premiums don’t just save the business from financial harm, they count as tax deductible expenses.
Common types of tax deductible business insurance premiums are:
- General liability insurance covers legal expenses in the case of a business being sued for injuries or damages.
- Professional liability insurance covers lawsuits the business may face due to negligence or errors in their work.
- Commercial property insurance provides compensation if there are necessary replacements or repairs of business property such as real estate or equipment.
- Business interruption insurance is typically a part of a property insurance policy and covers any lost income if a location is shut down due to damages.
- Commercial auto insurance covers liability and property damages, specifically those associated with a business-owned vehicle.
Interest expenses
It’s not uncommon to fund operations on credit. Loans, lines of credit, and credit cards are all tools used to access capital that helps grow businesses.
No matter the type of credit, the interest paid on borrowing is tax deductible. However, this only applies to credit that’s in the business’s name.
Keep in mind that only the interest portion of payments are tax deductible. Credit statements and amortization schedules should show a clear breakdown of what portion of a payment goes towards the principal of the loan, and how much is an interest expense.
Business meals
Meals with clients, partners, or employees are all considered tax deductible, so long as certain criteria are met:
- The expense is ordinary and necessary.
- The business owner or an employee of the business is present.
- The meal expense is not considered lavish or expensive.
- There was an active conversation of business before (such as making a sales pitch or discussing the prospect of a future partnership) before, during, or after the meal.
It’s helpful to document the purpose of the meal on the receipt. Quickly jot down who was there and what was discussed to have that information on record.
Employee training and education
Investing in an improvement of the skills of employees counts as tax deductible activity, so long as the skills relate to the business.
Training and education includes workshops, seminars, and classes from a formal institution. For example, sending the sales team to a seminar on new sales techniques would qualify. Or investing in a bookkeeper getting their CPA.
Bank fees
Bank accounts come with a variety of fees depending on the activity in the account, such as transfer fees, overdraft fees, and account fees.
If the account is a business bank account, then all bank fees can be claimed as tax deductible. Otherwise, you can only claim fees that occur on business-related activity.
This extends beyond bank accounts. Fees that occur in an online platform like PayPal or a payment process like Stripe or Square are also considered bank fees for tax reporting purposes.
Legal and professional services
Legal and professional is an umbrella term that covers any services provided by an accountant, bookkeeper, lawyer, tax preparer, or consultant, to name a few examples. Working with these services doesn’t just give you peace of mind, it gives you tax deductions.
Professional dues or subscriptions
Dues and subscriptions are any membership fees paid to organizations, clubs, or associations. Some examples include:
- Bar associations
- Medical associations
- Trade associations
- Chambers of commerce
- Real estate boards
Depreciation
Depreciation is the process of spreading the cost of a capital asset over its useful life. Instead of recording the cost in a single tax year, it’s “depreciated” over multiple years.
This means you get a tax deductible expense in each year the asset is depreciated.
Examples of assets that can be depreciated are machinery, buildings, and vehicles.
There are three types of depreciation.
- Straight-line depreciation: Depreciation is spread out equally over the asset’s useful life.
- Double declining balance: Depreciation is accelerated in the early years of the asset’s useful life.
- Units of production: Depreciation is calculated based on a usage metric, like units produced or hours of usage.
What type you use should depend on the type of asset. Once you’ve purchased an asset that will be depreciated, pick your method, figure out the calculation, and be diligent with record-keeping.
Business travel
For travel expenses to qualify, they must be ordinary, necessary, and outside of your “tax home.” Your tax home is the city or area that you conduct business in.
Some examples of business travel expenses are:
- Travel to and from a destination by plane, train, bus, or car
- Hotels and other forms of lodging
- Sim cards including e-sim cards
- Shipping of baggage or supplies between locations
- Taxi or ride share fares to and from hotels or travel hubs
- Meals while traveling
- Business calls and communication when out of town
How to maximize savings with business deductions
If you aren’t properly filing your business deductions, you’re leaving money on the table. Or, more accurately, you’re basically paying for things twice. Tax deductions are crediting you for purchases you’ve made for your business, so it’s crucial that you carefully document and file each of those purchases.
Accurately track your expenses
It’s difficult to maximize your business deductions when you don’t remember or have evidence of eligible business expenses. Find a system that works for your team which will track expenses and make it easy to categorize and find expenses throughout the year. Proper expense management will mean having access to every transaction so that business owners or accountants can properly deduct rent, marketing costs, and other tax write-offs.
Unlike personal taxes, you don’t use standard or itemized deductions when filing business taxes. Business tax deductions fall under three categories: Actual, ordinary, and capital.
Categories of business expenses:
- Actual expense: Actual expenses are deductions that are the actual cost of an item you get a deduction for. Ex: receipts and mileage driven.
- Ordinary expense: Ordinary expenses (or normal expenses) are expenses you incur when running a business. Ex: rental expenses, utilities, and benefits.
- Capital expense: Capital expenses cannot be deducted and need to be capitalized because they are investments in nature. Ex: improvements, business assets and start-up costs.
Capitalizing
Some business expenses are one-time purchases that are an investment to generate revenue, but will most likely depreciate over time. These types of purchases are typically equipment, real estate, or sometimes vehicles. One way to partially claim these purchases for deductible business expenses is to capitalize the expense.
Capitalizing an expense means claiming the depreciation of the purchase on the business’s income statement as a way to accurately reflect assets.
Never miss a tax deduction with expense tracking
Tracking tax deductions involves recording, categorizing, and collecting receipts for every transaction. It takes diligence, time, and effort to not leave any deductions on the table.
However, with an expense management platform like BILL, you can easily stay on top of every dollar spent on company cards. Expenses are automatically coded and synced to your accounting software, saving you time on manually reconciling accounts.
Want to see the platform in action? Reach out to schedule a demo.
