We never want to pay more taxes than we have to. You may know it's important to keep track of expenses, but you don't recall which expenses matter and why. Here's why!
table of contents
foreign earned income exclusion
Start Up Costs
Small business owners who have launched a new business venture in the latest tax year can write off up to $5,000 in startup expenses. Startup expenses include any costs incurred to create the business or buy the business.
Amount deductible: Up to $5,000
Eligibility:
The IRS classifies business startup expenses as capital expenses because they are used for an extended period of time, not just within one year.
Example deductions:
Marketing costs
Travel costs
Training costs
Special considerations:
If you are buying tangible business-use assets, such as vehicles or equipment, the costs of these assets must be depreciated over the life of the assets.
Business Meals
Business meals for employees and clients can be considered tax-deductible. Qualifiable purchases depend on the purpose of the meal and who benefits from it.
Percentage deductible:
Entertaining clients – 0% deductible
Business meals with clients – 50% deductible
Office snacks and meals – 50% deductible
Company-wide party – 100% deductible
Meals and entertainment expenses – 100% deductible
Eligibility:
The expense must be reasonable and not extravagant or excessive.
The taxpayer or an employee must be present.
The meals must be served to a current or potential business customer, consultant, client, or similar business contact.
If the meal is provided at an entertainment activity, it must be purchased separately from the activity itself.
Example deductions:
Meal expenses while traveling on business
Reasonable food and beverage spent on social company activities, including holiday parties and happy hours
Special considerations:
In order to be eligible, meal costs must be considered reasonable. Exorbitant prices for extravagant meals likely won’t qualify as a deductible business expense.
Business Insurance
Business insurance can be completely deducted from your taxes if it is considered both ordinary and necessary to your company’s operation. The vast majority of modern businesses are required to carry some form of business insurance due to state laws, industry regulations, or required contracts.
Percentage deductible: 100%
Eligibility: If the business insurance policy benefits the business and serves a business purpose, it can be considered eligible for tax-deduction.
Example deductions:
Data breach insurance
General liability insurance
Workers’ compensation insurance
Commercial real estate insurance
Professional liability insurance
Special considerations:
Not all business insurance premiums can be written off. If the insurance policy in question is not considered ordinary and necessary, the IRS likely won’t approve.
Business Interest
Loans taken out for business purposes, including mortgages on business real estate or lines of credit obtained for business purchases, may qualify for tax deduction.
Percentage deductible: 100%
Eligibility:
The taxpayer must be legally liable for the acquired debt.
The taxpayer and the lender have a true debtor-creditor relationship.
The taxpayer and the lender must intend for the debt to be repaid.
Example deductions:
Investment interest expenses
Interest on purchases made on credit for inventory stock
Prepaid mortgage interest on loans for business property
Interest on credit card debt
Special considerations:
Interest that must be capitalized does not qualify as tax-deductible. This includes any interest added to a principal balance of a business loan or mortgage. Capitalized interest should be assessed and depreciated along with other costs of the business asset.
Advertising & Marketing
In the eyes of the federal government, small business advertising and marketing efforts qualify as fully tax-deductible. As long as the actual expenses are considered ordinary, reasonable, and necessary, business owners can count on this deduction to lower their liability.
Percentage deductible: 100%
Eligibility:
Any marketing or advertising expenses spent on campaigns to generate or retain customers can be deemed eligible.
Example deductions:
Costs of producing advertising materials such as business cards, flyers, etc.
TV and newspaper advertising costs
Influencer marketing
Special considerations:
Costs that are considered primarily personal are exempt from deduction, even if they have some promotional value.
Business Use of Car
Costs associated with operating a business vehicle are tax-deductible under certain qualifying circumstances.
Percentage deductible: 100%
Eligibility:
Business vehicles are cars, SUVs, and pickup trucks that are used for business activities. Taxpayers looking to write off business use of car expenses will need meticulously kept records to provide to the IRS.
Example deductions:
Registration fees and taxes
Gas and oil costs
Maintenance and repairs
Licenses
Vehicle insurance
Rental or lease payments
Tolls and parking fees
Special considerations:
If the taxpayer uses the car for both business and personal purposes, they must split the costs based on actual mileage. Vehicles used as equipment, such as dump trucks, and vehicles used for hire, such as taxi cabs and airport shuttle vans, do not qualify.
Beginning on January 1, 2020, the optional standard mileage rate used to deduct the costs of operating a business vehicle changed to 57.5 cents per mile.
Education
Small businesses that provide their workforce with educational benefits may be able to fully deduct the associated costs of offering this perk. Tax-deductible education expenses include everything from continuing education to courses intended to provide workers with advanced professional licenses.
Percentage deductible: 100%
Eligibility:
Deductible education costs must add value to the business and increase the workforce’s expertise and skills.
Example deductions:
Classes and workshops intended to improve skills in the business’s field
Subscriptions to professional publications
Industry relevant seminars and webinars
Special considerations:
Educational expenses that qualify employees for a different trade are exempt. Courses necessary to meet the minimum education requirement are also exempt from tax deduction.
Depreciation
Depreciation is a method where the cost of fixed and tangible assets are allocated over time. Depreciation effectively measures how much an asset’s value has been exhausted within a given time.
This tax write-off allows small business owners to assess the value of an asset over time while factoring in its age, wear, and decay.
Percentage deductible: 100%
Eligibility:
The taxpayer must own the asset.
The asset must be used for income-generating operations.