How do I know what business expenses I can deduct?

Deductible business expense must be:

1. Ordinary and necessary for the business
2. not extravagant, and
3. primarily for the business (not personal)

Basically, money you spend in a reasonable way, with an expectation of bringing in business revenue, is a deductible expense. To claim the deductions, a business must be operated to make a profit.

Types of Deductible Business Expenses

Cost of Goods Sold

If your business manufactures products or purchases them for resale, some of your expenses may be included in figuring the cost of goods sold. You deduct the cost of goods sold from your gross receipt to figure your gross profit for the year. If you use an expense to figure the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring the cost of goods sold.

• The cost of product or raw materials, including the cost of having them shipped to you
• The cost of storing the products you sell
• Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
• Factory overhead expenses

Ordinary and Typical Business Expenses

An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. The following is a list of some of the most common ordinary and typical business expenses that a deductible.

• Business Use of Home - If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to IRS Publication 587 (Business Use of Your Home).
• Business Use of Your Car - If you use your car in your business, you can deduct car expenses. Refer to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses).
• Employees' Pay - You can generally deduct the pay you give your employees for the services they perform for your business.
• Retirement Plans - Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees', retirement.
• Rent Expense - Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
• Interest - Business interest expense is an amount charged for the use of money you borrowed for business activities.
• Taxes - You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
• Insurance - Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

Types of Non-Deductible Business Expenses

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. There are three types of costs you capitalize.

• Business start-up costs
• Business assets
• Improvements

Personal Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, you must divide the total cost between the business and personal parts. You can deduct as a business expense only the business part.

Disclaimer: The National Small Business Association is in no way providing tax advice. The organization only is providing information. Before filing your tax return or proceeding with any official action, please consult a tax professional.