Small business deductions

us tax small business expenses
  • by admin
  • February 11, 2021

What can you legally write off as a business expense? You may think that the money you spent is for your business. However, IRS may consider it differently. In this topic, we are trying to discuss and give an idea that what are the tax w-offs legally allowed and most importantly how it should be presented in your favor.

 

Deducting business expenses

This could vary for a small business or for a large corporation or other legal entity. In the case of a small business, there are certain expenses that IRS will allow you to w-off. For example “home office expenses.”

 

Small business tax-deductible expenses?

As defined by IRS, your business may qualify as a small business:

  1. Your yearly gross revenue is $26 million or lower for the last three tax years, and
  2. You are not a tax shelter

For new businesses that are in existence for less than three years, they can use average yearly gross receipts since they came into existence. If you were operating as a different entity before or new business include that entity’s gross receipts as well. Whether you are sole-proprietor, Partnership, or incorporated this applies in all situations.

  • You are in business when your activities are intended to generate revenue. Your hobbies are not business activities and hence expenses related to those activities can not be claimed as tax-deductible expenses on your tax return.
  • IRS assesses your taxes payable on your net business income. Net business income means your gross revenue less tax-deductible expenses or tax write-offs.
  • All your business-related expenses could be tax-deductible however some of them may not or some of them can only be claimed in certain circumstances or some of them could be limited to a certain amount.

Let us look into a few examples. You are in the business of a real estate broker. You bought your cell phone for your business and it is your tax-deductible expense. However, you bought a new suit or dress to meet with your clients and it is your personal expense and hence not tax-deductible. Furthermore, you met with your client for lunch and paid for the food and beverages. The payment you made for food and beverages is categorized under “business meals” and only 50% of the expense is tax-deductible.

You pay taxes on your net businesses income, which is calculated by deducting your business expenses from the revenue. You may think of many operating expenses but all may not be tax-deductible and for certain for some deductions conditions may apply.

IRS considers your tax-deductible expenses based on both “ordinary and necessary” for your business and reasonable a reasonable amount. An inappropriate claim of tax-deductible expenses may trigger an audit by IRS. If your expenses are found non-deductible, you will be subject to tax, maybe additional taxes payable and interest, and penalties on taxes payable. Moreover, you will be concerned about spending your time with IRS in providing documents and explanations.

Herein below is the checklist for you from many of those tax-deductible expenses that may apply in your situation. The list is not comprehensive. The expenses must have both the elements of what is “ordinary and necessary”. You may please discuss these items with a tax professional, your CPA. To learn a little more detail about the below-mentioned 44. expenses, please visit our blog, “44-Tax deductible expenses.”

  1. Business income deduction on income reported on Schedule C
  2. Cost of goods sold as your ordinary tax-deductible expense
  3. Contract labor and other direct costs
  4. Freight, excise, and import duties
  5. Salaries, wages, and benefits to employees
  6. Advertising and marketing expense
  7. Business gifts and promotions
  8. Bonus depreciation as 100% of the cost of qualifying property
  9. Bank charges and credit card charges
  10. Interest on long term loan, personal loan, and short-term loan
  11. Insurance premiums
  12. Business meals with customers and suppliers
  13. Commissions
  14. Motor vehicle expenses
  15. Charitable contributions and political contributions
  16. Local transportation
  17. Maintenance and repairs
  18. Cleaning supplies and janitorial services
  19. Legal and professional fees
  20. Real estate losses
  21. Rent for an office building, warehouse, and your business
  22. Property tax, insurance, and building maintenance
  23. Equipment rental
  24. Home office
  25. Utilities
  26. Research and development expense
  27. Supplies for your business
  28. Taxes and licenses
  29. Telephone, fax, and internet
  30. Website development and maintenance
  31. Software development and maintenance
  32. Travel expense local or international
  33. Bad debt expense
  34. Depreciation and amortization
  35. Education and training expense
  36. Health insurance expense
  37. Healthcare out-of-pocket expenses
  38. Retirement plans
  39. Organizational costs
  40. Startup costs
  41. Moving expenses
  42. Work opportunity credit
  43. Child and dependent care
  44. Family and medical leave (paid)

As defined by IRS your tax-deductible expense is considered as “ordinary” when these expenses are common and accepted in your industry. Your tax-deductible expenses are considered “necessary” when these expenses are helpful and appropriate for your business. Expenses that are necessary for your business need not be essential or vital for your business. You need to figure out or take the help of your CPA to claim your tax-deductible expenses and find out what are your costs of goods and services sold, other business expenses, capital expenses, and personal expenses. Your costs of goods sold include your inventory. Valuation of your business inventory is another important task that involves IRS guidelines and generally accepted accounting principles.

 

Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.

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