Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible from the total amount of revenues on which the business entity (or sole proprietor, partnership, or corporation) must pay U.S. federal income tax. To claim the deductions, a business must be operated to make a profit.
Types of deductible business expenses
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 & Typical business expenses (Partial list)
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 deducbible.
- 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.
- Telephone calling cards - If your team is traveling cross country or internationally, these items can help cut back on costs and be used in emergency situations if a phone goes out or if there's no cell service in the area. For more information refer to Telephone Calling Cards
- 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.
Note: This list is not all inclusive of the types of business expenses you can deduct. For additional information, refer to Publication 535, Business Expenses.
Types of Non-deductible business 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, in general, three types of costs you capitalize.
- Going into business
- Business assets
Over time, certain types of capital expenses lose value. This is called depreciation. This loss in value can, over time, be converted into an operating expense, and therefore, be deducted as a business expense. This process of devaluation and conversion into operating expense is called amortization. There are strict guidelines on the length of time certain types of capital expenses can be amortized. The IRS provides guidelines for amortization.
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.