Attention to expense deductions may not play a prominent role in the financial planning process for small businesses and startups—and that may be costing them. Sure, you’re focused on customer service and improving your products and services. But some easy moves could significantly lessen your tax bill.
For example, say you’re putting 250 miles per week on your private vehicle to get products out to customers. It may seem time-consuming to keep a log separating business and personal use, but you’re losing out on close to $600 in deductions. Or maybe you shuttered your office and started running your company from a spare room. As long as the space is exclusively used for business, you can deduct $5 for every square foot, up to $1,500.
Business expenses are the costs of running a company and generating sales. Given that broad mandate, the IRS doesn’t provide a master list of allowable small-business and startup deductions. As long as an expense is “ordinary and necessary” to running a business in your industry, it’s deductible. That makes it well worth the time to organize your spending so your business takes all legitimate write-offs, creates an effective financial plan, pays the proper amount in quarterly taxes—and doesn’t need to sweat an audit.
What Is a Tax-Deductible Business Expense?
Which expenses may be written off varies depending on the nature of your business. Start by reviewing Internal Revenue Service Publication 535, which discusses the deductibility of common business expenses and general rules for filing your taxes.
Those “ordinary and necessary” expenses must be incurred in an organization motivated by profit. Even if your small business faces financial problems and doesn’t actually generate a profit, the intent needs to be there. Otherwise, the IRS may determine your business is a hobby and disallow expenses.
The IRS also suggests distinguishing usual business expenses from categories that fall under the cost of goods sold (COGs) and capital expenses to ensure accuracy, since some business expenses cannot be deducted in the year they’re incurred.
What Are Business Expense Categories?
By developing expense categories that fit your business and recording and organizing expenditures as you go, you’ll find it easier to get all the deductions you’re due.
You’ll also save significant headaches for your bookkeeper or tax preparer. Speaking of, it’s worth spending time with a financial adviser to understand the types of expenses you can and can’t include in a specific category.
Below is an example small-business expense categories list that applies to most companies, outlining what’s included and how you can qualify for a deduction. Add to this industry-specific categories, such as R&D costs or spending to seek VC funding.
36 Business Expense Categories for Small Businesses and Startups
This covers the cost of items and services to directly promote or market your business. Examples include fees paid to advertising or marketing companies to produce promotional materials, billboards, brochures, posters, websites and social media images. You may even deduct spending on a PR campaign.
This can include courses for continuing education or seminars to stay current on industry trends. Relevant materials, books and registration fees for you and your employees are tax-deductible. You can also deduct payments made to employees to reimburse them for relevant educational expenses.
Credit and collection fees:
Businesses that use accrual basis accounting, where revenue and expenses are recorded when they’re earned or incurred even if no money changes hands at that point, can deduct unpaid invoices as business bad debt. Any fees spent trying to collect on debt, such as hiring an outside company to collect what’s owed, also count. A better bet: Minimize bad debt and increase cash flow by optimizing your billing processes.
Interest paid on business loans, ongoing credit lines and business credit cards are tax-deductible expenses. Bank fees, such as monthly maintenance or overdraft fees, also count.
Dues and subscriptions:
Subscriptions to industry magazines or journals related to your business can be deducted on your taxes. Membership fees include those paid to professional or trade associations that can help promote your business and even to your local Chamber of Commerce.
Employee benefit programs:
Payments made toward benefits such as disability insurance, life insurance, dependent care assistance, health plans for you and your employees and adoption assistance are tax-deductible. Note that this is one area, along with workers’ compensation insurance, where companies tend to spend more than they need to.
Besides that workers’ compensation insurance, you can deduct premiums for business-related insurance, including for liability, malpractice and real estate. Auto insurance premiums on a personal vehicle are a bit more complicated: If you deduct a flat mileage rate, you can’t itemize and must use the actual expense method, where you determine what it actually costs to operate the car for the portion of the overall use of the car that’s business use.
Maintenance and repairs:
Companies that use fleet vehicles as part of their operations can deduct the portion used for business. Deductible expenses include parking fees and gas. Otherwise, you can choose to utilize the standard mileage rate. Additionally, repair and maintenance of other types of equipment and machinery used in your business can also count.
Under actual expenses calculations for vehicles, you may include gas, oil, repairs, tires, insurance, registration fees, licenses and depreciation (or lease payments) prorated to the total business miles driven.
Legal and professional expenses:
These can include fees paid to certified public accountants (CPAs), financial planners, lawyers or other types of professionals.
Office expenses and supplies:
Items such as cleaning products, paper, notebooks, stationery and even snacks and beverages for employees can be deducted as supplies. The expenses category includes costs related to operating your business, such as website hosting and software.
Monthly telecommunications fees in a commercial space can be deducted, as can additional phone lines in a home office as well as cell phone contracts as a subcategory of office expenses.
For a commercial space, utilities such as electricity, internet, sewage and trash pickup fees are fully deductible. For a home office, you can deduct utilities in proportion to how much of your home is used for business.
Postage and shipping:
Stamps, freight and postage fees to mail business-related items, including products to customers and return shipping labels, count. Envelopes and packaging materials are included in office supplies.
Items such as ink cartridges, printers or payments for printing services can be included under this business expense category. Note that if you decide to do some direct-mail marketing, you can deduct the cost of producing the materials here, but postage must be listed separately even if the printer handled mailings.
Any rental payments made to occupy a warehouse for inventory or office space to conduct business are tax deductible. Your business structure—C corporation (C-corp) or S corporation (S-corp)—dictates whether you can pay a reasonable amount to rent property from shareholders.
Salaries and other compensation:
Employee salaries, gross wages, commissions, bonuses and other types of compensation count as tax-deductible expenses. Compensation can even extend to salaries paid to children and spouses, provided payments were made through payroll and those individuals performed services for your business. The amount paid does need to be considered reasonable.
Business-related travel expenses include flights, hotels and meals—but note that only 50% of the cost of meals for employees and customers is deductible. Costs for candidates who are traveling for an interview are deductible. Examples include parking fees and flights.
Costs include cell phone, electricity, internet, sewage and trash pickup fees (for commercial spaces).
You can deduct 50% of qualifying food and drink purchases. It needs to be related to the business, such as work conferences and meals on business trips. As a small business, you can deduct 50% of food and drink purchases that qualify.
Business use of your car:
You may be able to write off costs of maintaining and operating your vehicle if it’s strictly for business use. However, if it’s mixed, you can claim mileage related to the business use.
For work-related moving expenses, you may be able to deduct 100% of the costs related to your move. You will need to pass the distance test, such as your new job location being at least 50 miles from your former location.
These are costs for big ticket items like machinery or a vehicle over its lifetime use, instead of it over one single tax year.
You can deduct charitable contributions made to qualifying organizations—you may need to itemize these deductions.
Child and/or dependent care:
Qualifying costs associated with child or dependent care can be written off, though you’ll need to meet the IRS requirements.
Businesses who launched a new venture may be able to deduct up to $5,000 in startup expenses leading up your launch. Examples include marketing and employee training costs.
If you’re purchasing a building or taking out a loan to build or improve your home for business purposes, you may be able to deduct the interest incurred.
Ones, such as bookkeeping software or recurring subscription with SaaS companies, used for business related purposes may be fully tax deductible.
Books and magazine subscriptions:
Magazine, books and journals that are specialized and directly to your business may be tax-deductible. For instance, newspapers may not be, but industry-specific magazines would.
Foreign earned income:
If you have a business based abroad you may be able to leave out any foreign income earned off your tax return, known as foreign earned income exclusion. You’ll need to meet certain requirements such as being under a certain income threshold.
Self-employed individuals, who pay for their own medical care expenses or insurance premiums, can deduct these expenses on their tax return. Examples include doctor’s fees and prescription drugs.
Licenses and permits:
Any required licenses and permits can be tax deductible. Examples include building permits and licenses to practice law in your state.
Manufacturing or raw materials:
These are directly related to the cost of goods sold or items and storage paid to sell your products.
Contributing to a tax-advantaged account, such as an IRA or 401k, can reduce your taxable income—a great way for those who are self-employed to save on taxes.
Real estate taxes:
If you have a home office and itemize your taxes, you may be able to deduct some of the taxes you pay.
Gifts for employees, clients or vendors may be fully tax deductible. For example, you give your employees gift baskets during the holiday season or send gift cards to vendors.
If you pay an advance to an employee and expect them to pay you back (as in, they didn’t do any extra work to earn this “extra” income), you can deduct this amount. However, any interest paid may count as business income.
Skip the Golf?
|Party or cookout for employees||100%|
|Reimbursable meals for employees||50%|
|Meals with customers or prospects||50%|
|Other entertainment for customers or prospects, such as a sporting event or round of golf||0%|
If you have employees who frequently travel for business, ensure you follow small-business expense management best practices like making it easy for them to upload the receipts required by the IRS.
3 Steps to Categorize Expenses for Your Small Business or Startup
Poor tax compliance and inconsistent cash flow are among the top 10 financial challenges for small businesses. You can break that mold by being consistent in categorizing expenses. That allows you to see where and how much you’re spending to operate your company while being prepared come tax time.
You’ll also gather insights that will enable you to create a financial statement that adds visibility into profitability and cash flow. These statements are required for audits and are often requested by investors.
Here are three steps to categorize business expenses.
Determine correct categories for your specific business.
Choosing the right categories will depend on your industry. For example, a greeting card business may have dedicated categories for shipping and storage rental, whereas software-as-a-service (SaaS) companies may have categories for digital services.
Start by identifying the expense categories your business uses the most—that financial statement will help here—and ones that you’ll need to grow. Refer to the list above to get started.
Reconcile and review financial accounts regularly.
Reviewing financial accounts is a good habit that will encourage you to stay on top of your expenditures. Reconciling bank statements can be easily done using accounting software. If you find you’re having challenges, a business-only credit card is a top expense management best practice.
Assign a category to all transactions.
Using the list of categories you came up with, look at your spending details and assign anything deductible. Pay particular attention to where receipts are required. Note that keeping business and personal finances separate is a top financial tip for small businesses and shields you from liability, so as you assign an expense, make sure it’s business-related.
What Else Can I Deduct as a Business Expense?
As we’ve mentioned, your home can yield many deduction opportunities, based on the percentage of space your office occupies—but you’ll need to itemize mortgage interest, utilities, insurance and property taxes. Or, you can claim the standardized deduction, which is $5 per square foot up to 200 square feet.
A few other items you may not have considered:
The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain groups, including some veterans and disabled individuals, who face significant barriers to employment.
Costs to protect intellectual property created by you or your employees, such as software code, a logo for your business or a patent for a new product or service.
Losses from a natural disaster or crime. If a fire or flood destroys your stock, or items are stolen, you may deduct losses not covered by your insurance.
Use Accounting Software to Track Spending and Categorize Business Expenses
One of the easiest ways for business owners to categorize expenses and track spending is to use accounting software, which often has prepopulated business categories. You can amend or add as needed, and it will automatically compile transactions.
Accounting software also helps you to use the data from your expenses to run profit and loss reports. Doing so shows you the amount you’re spending in each category so you can assess whether you need to get your costs under control or if you’re on track. You can break down spending at specific time intervals to see how expenses change. These reports simplify the deduction process while revealing your annual business expenses.
Free Business Expense Worksheet
One of the most exhaustive guides to what requirements need to be met for qualifying business expenses is the IRS publication 535. However, if you want a resource that’s easier to wade through, download our free overview guide. You can review a list of common business expense categories as well as nondeductible items.
Small Business and Startup Expense FAQs
What can be written off as a business expense?
Generally, if an expense counts as ordinary and necessary to conduct business, you can deduct it as a business expense. There is no comprehensive list because what counts as “ordinary and necessary” is highly dependent on industry.
What can’t be written off as a business expense?
Any spending considered a personal expense can’t be written off. In addition, you can’t deduct expenses related to client entertainment, with the exception of meals; fines or penalties for violating a law; country club dues; and illegal payments.
Can you deduct job expenses?
As of 2018, job expenses, such as for a relocation or other costs paid by workers but not reimbursed by employers, are no longer eligible. However, if a business reimburses an employee, then the employer can deduct that reimbursement as an expense.
Can I write off my business startup costs?
Businesses can write off startup costs, depending on the type of expenditure. Allowable deductions must be directly related to getting the business up and running and organizational in nature, such as training staff and incorporation fees. You may be able to deduct up to $5,000 for startup and an additional $5,000 for organizational costs.
Can I take the standard deduction and still deduct business expenses?
Yes, you can deduct business-related expenses even if you take the standard deduction.
What are three major types of expenses?
The three major types are fixed, variable and periodic.
- Fixed expenses are those that don’t change for the foreseeable future. These can include auto lease payments or rent.
- Variable expenses are expenses such as utilities, which can change from month to month.
- Periodic expenses are ones that happen occasionally, like business travel or emergency car repairs.