For many business owners, tax season is a stressful time. There’s a delicate balance between making sure you receive all possible deductions to optimize your tax bill and going too far and misunderstanding what qualifies as deductible business expenses. Read on to learn how eligible business expenses can save you money when filing your tax return.
What is a deduction?
A tax deduction is a subtraction from the taxes you have to pay. Businesses only pay taxes on net income, which is gross revenue minus eligible business expenses. For example, if your business brings in $100,000 during the year, but spends $40,000 to operate, only $60,000 of that income is taxed.
Business expenses are generally tax deductible, as long as they are “ordinary and necessary.” This is the standard set by the IRS, which means that expenses which are common in your industry and needed to help your business prosper are eligible. Deductible business expenses directly relate to your operation, and exclude any personal or family expenses.
What IS a deductible business expense?
There is a long list of eligible business expenses. Generally, money spent on something used to run a business is deductible.
Your home office, if used exclusively for work purposes, is tax deductible for both homeowners and renters. The IRS explains how to calculate deductions for a home office, either by measuring the office’s square feet and deducting $5 per square feet (up to $1,500), or calculating a percentage of mortgage interest or rent to deduct. These expenses may also include mortgage interest, real estate taxes, insurance, utilities, repairs and depreciation.
Travel for business is a common deduction. Business travel costs like flights, trains, hotels and conference tickets can be subtracted from your gross revenue. You can also deduct mileage between offices, clients, meetings and work-related events. The standard deduction rate is 58.5 cents per mile in 2022, up from 56 cents per mile in 2021. Generally, you cannot claim mileage incurred while driving from your home to an office. An exception to this is if you have a home office, and an off-site office, in which case that is technically considered travel for business.
Office supplies & expenses
Office supplies include the items you’d typically think of belonging in an office like printer toner, notebooks, pens and paper. It also includes some items not traditionally thought of as office supplies like toilet paper, beverages for an employee break room and janitorial cleaning supplies.
Office expenses cover costs like utilities, rent, internet hosting fees, employee cell phone expenses and computers.
The cost of hiring staff and contractors, running payroll and continuing education is tax deductible. Additionally, meals provided to employees or purchased during business travel are partially deductible, as you can claim up to 50% of a meal for business purposes.
Standard operating costs are deductible business expenses, including advertising, marketing, web development, insurance costs, subscriptions, internet and phone bills, and interest on a business loan. You can also deduct the cost of using professional financial services, like a tax preparer or financial advisor.
Personal and business expenses
If you use a space or item for both work and personal use, you can typically deduct a percentage of that expense. For example, if you use your cell phone for work 10% of the time, you can deduct 10% of your cell phone bill. The same is true for utilities in a home office.
What ISN’T a deductible business expense?
While most common business expenses are deductible, there are a few exceptions. Some examples include:
Education that doesn’t relate directly to a necessary certification or degree in your field
- Anything exclusively for personal or family use
- Mileage between your work and home
- Capital expenses/assets including start-up costs
Business expense vs. capital expense
Capital expenses cannot be completely deducted from your taxes in the year they were acquired. Typically, any major acquisition that will last longer than one year (i.e. machinery) is considered an asset. They are deducted over a period of their predicted “useful life” by deducting the depreciation of a tangible asset (the devaluation of an asset over time), or an amortization of an intangible asset (a portion of the initial expense over a period of years). There are special rules for particular capital expenses.
Get the Most Out of Tax Time
Taxes may be complicated, but they don’t have to be stressful for business owners. A professional service can help you navigate the deductions and exceptions relevant for your unique business situation.
If you want to maximize your deductions, meet with a professional and get personalized advice, contact Gift CPAs to learn more about our tax preparation and planning services. We have years of experience working with local businesses and individuals to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!