Small Business Taxes & ManagementTM--Copyright 2003-2020, A/N Group, Inc.
What's deductible? You would think the IRS has a list, but the Internal Revenue Code provides little detail other than "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". That phrase covers about 95% of the items deductible. (The law specifically mentions salaries and other compensation for personal services, traveling expenses, rent, interest, taxes, depreciation, pension and profit-sharing expenses and a few other items.) The IRS Regulations, court cases and other rulings provide most of the additional guidance. We've been frequently asked to provide readers with a list of expenses they can deduct. The list below is general in nature but should provide a starting point.
Please keep in mind that only expenses related to your business are deductible. Often that's easy to show--office telephone, normal office supplies, shop tools, etc. But in some cases you may have to show the expenditure was business related. If the item seems out of place in your business, or can have personal uses, be sure you have some sort of documentation to support the expense. Vehicle expenses and other "listed property" as well as travel and meal expenses have specific reporting requirements and business/personal use may require allocation. And keep in mind that in order to secure a deduction you need not only an expense that qualifies as deductible, you also need have adequate documentation to support the expense. That generally means proving the expenditure was incurred (typically with an invoice) and proving it was paid (canceled check, receipt, etc.).
The rules can often be complicated. The best approach is to record all your expenses in detail and discuss them with your accountant or tax advisor.
Here's our list. It's far from all inclusive and some of the items are subject to special rules. We've included comments on certain items. While intended for taxpayers filing a Schedule C, the rules generally apply to all businesses.
Accounting, legal fees On Schedule C use line 17, legal and professional services. Some legal and accounting fees may not be deductible, or must be capitalized.
Advertising Include flyers, direct mail, yellow book, internet ads, and in journals (such as local high school yearbook), sports sponsoring events.
Amortization Some costs such as start-up expenses, organization costs, etc. may be partially deductible up front; excess amounts can't be deducted but must be capitalized and amortized over a number of years.
Auto Actual expenses or standard mileage. Must have a diary or log showing date, time, mileage, destination, business purpose.
Charitable contributions Special rules apply to regular corporations; contributions by S corporations, partnerships, and sole proprietorships are deductible by the shareholders/partners/owners on their individual tax return.
Cleaning (Office, shop, etc.)
Cost of goods sold
Credit and collection charges
Dues and subscriptions
Education Courses to maintain and improve skills, courses to maintain license, for both you and employees, but can't claim education credit and can't qualify the person for a new job.
Employee benefit programs Health insurance, group-term life insuranc, dependent care assistance, etc. Can't deduct your own health insurance on Schedule C. Use Line 16 of Form 1040.
Equipment, auto lease, etc. rent Building, office rent goes on a separate line.
Home office Special rules apply.
Insurance Business, etc., but not health. Include liability, business owners, auto (company owned vehicle), workers' compensation, etc.
Internet service Web connection and web hosting, business portion only.
Laundry Uniforms used in business and only on the job.
Legal Some legal expenses, such as those associated with asset purchases, can't be deducted directly.
Meals Special rules apply. Generally only 50% is deductible.
Office expense Outside costs such as temporary help, secretarial services, etc.
Pension and profit sharing
Repairs Expenses that keep equipment in repair, not prolong its life.
Salaries and wages Show gross, before deduction for withholding taxes.
Small tools And those with life of less than a year. Others must be capitalized.
Software You may be able to deduct the full cost up front, longer lived software may be depreciated over three years.
Taxes Federal and state unemployment taxes, real estate for owned property, personal property and employer's portion of FICA.
Telephone Including cell phone
Utilities Electric, gas, water, sewer, etc.
There are some expenses that aren't deductible, but must be capitalized and depreciated:
Buildings and similar improvements
Repairs that extend the life of the property (Considered new property)
You may be able to write off up to $2,500 per invoice ($5,000 for taxpayers with audited financial statements) of some of these expenditures (e.g., equipment, furniture,) directly. You may be able to take the Section 179 expense election on up to $1,040,000 (2020 amount; indexed for inflation). For 2019 through 2022 100% bonus available for the first year. Special rules apply to certain building improvements.
Some expenses must be capitalized and amortized. They include:
Start-up expenditures (up to $5,000 can be expensed; limits and rules apply)
Organization costs (up to $5,000 can be expensed; limits and rules apply)
Business licenses with a life of more than a year
Acquisition costs of goodwill, customer lists, etc.
Some expenditures can't be deducted:
Penalties and fines Traffic tickets, fines for business activities.
Illegal bribes and kickbacks
Land And many costs associated with land; land improvements (e.g., landscaping) generally have 15-year life.
Legal expenses and some other expenses related to real property Lease payments that are really for the purchase of property Generally leases with a purchase option that's less than fair market value at end of lease. Instead, the payments are recharacterized into part purchase price (which can be depreciated) and part interest (which should be directly deductible.
Copyright 2003-2020 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 01/22/20