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How to deduct business expenses

By Top Tax Staff | Oct 16, 2012 6:00:00 AM | Business Taxes

All buisnesses have to cover the cost of operating expenses in the course of operation. Many of these expenses are essential to running a company such as repairs, supplies, and office equipment. Other beneficial expenses such as advertising and payroll are also important. The Internal Revenue Service allows business owners to deduct many of these expenses on their personal or business tax returns. However, before they try to claim these deductions, taxpayers should find out what is involved in deducting business expenses.

How to deduct business expenses

What are Eligible Business Expenses?

An important part of properly reporting these deductions is to understand which costs are included in eligible business expenses. According to the IRS, qualified deductions include expenses that are “ordinary and necessary”. This means that the expenses must be typical for the type of business operated and they must be necessary for the business’s operation. For example, an auto repair shop may need to purchase specialized repair tools that are necessary to conduct business. Even if these items are not common in other fields, as long as they necessary for the shop’s operation, they are deductible.

How to Determine the Cost of Goods Sold

Businesses that make products or carry inventory have to follow slightly different tax guidelines. Before these entrepreneurs can write off their expenses, they must first calculate the actual cost of goods sold. This cost refers to the expenses paid for raw materials that are used in production, as well as storage fees, labor costs, and any overhead expenses from the factory. Once a taxpayer figures the cost of goods sold, he or she can properly value the remaining inventory at year’s end. If a business expense is included in the cost of goods sold, then the taxpayer cannot claim it as a tax deduction.

Understanding the Difference between Personal and Business Expenses

A gray area for many small business owners is understanding how to differentiate personal expenses from business expenses. This is especially true for individuals who use cash or supplies for both home and business purposes. A simple way to keep these expenses separate is to record the percentage used for business reasons. This is the amount that can be deducted as a business expense. For example, if a vehicle is used 80 percent for business and 20 percent for personal use, then a taxpayer can write off 80 percent of the actual vehicle expenses such as gas, oil, and repairs as a business cost.

Learning how to deduct business expenses properly can help taxpayers take advantage of IRS provisions for business owners and avoid an untimely audit.

How to deduct business expenses

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How to deduct business expenses

Do you travel for your own business? Do you have employees who travel? Make sure you know which travel expenses are deductible – and which are not.

How “Business Travel” Is Determined

Business travel is a specific term determined by the IRS to describe travel away from your tax home. which is described by the IRS as “the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.” You are traveling away from home if your duties require you to be away from the general area of your tax home for a time that is at is “substantially longer than an ordinary day’s work” and that requires you to sleep or rest while away from home.  

Travel for Work Assignments

You must sleep away from home to be able to deduct these costs as travel expenses The travel must also be “temporary” (lasting less than a year).

You can’t deduct travel expenses for an indefinite work assignment (including any work assignment of more than a year). You also can’t deduct travel expenses if you expect to work at that location for more than a year.

Deducting Lodging Expenses

Long-term assignments at one location aren’t considered as “travel,” but employee lodging expenses at work locations, like renting an apartment while working at an extended assignment are deductible business expenses  .

What You Can Deduct for Business Travel

You can deduct costs to travel by train, bus, or airplane between your tax home and your business destination. For travel by ship, see the section on cruise ships below.

Transportation: You can deduct the cost of travel by plane, train, bus, or car between your home and your business destination. You can’t deduct the cost of a free ticket.

Taxi, commuter bus, airport limousine: You can deduct costs to take you from an airport to your hotel or to a business location.

Baggage and shipping: Costs for baggage delivery or for shipping business materials between your regular work location or tax home and a temporary work location are deductible.

Lodging and meals: You can deduct expenses for lodging and meals while away from home on a business assignment. You can submit actual expenses or use per diem rates, as determined by the IRS.

Other expenses; You can deduct other costs while traveling for business:

  • Dry cleaning and laundry
  • Business phone calls and faxes (not personal calls)
  • Tips for allowable expenses.
  • Other similar business expenses while traveling like computer rental  

Business meals while traveling are deductible expenses, at 50% in most cases, but entertainment expenses are no longer deductible in any business situation.  

Deductions for Special Types of Travel

Conventions and Trade Shows: If you travel to a convention or trade show, you may need to show that the convention is directly related to or associated with your business. If you have a sales booth at the convention, that would qualify. If you are a delegate to a convention, the purpose of the convention must relate to your business. Travel to and participation in conventions for political, investment, social, or other purposes is not deductible.  

Cruises: Cost of travel on cruise ships, even for direct or associated business purposes, is limited. The IRS sets daily limits on luxury water travel each year, depending on the dates (months) of the cruise, based on an amount twice the allowable federal per diem rate for that travel period. IRS Be prepared to provide documentation that the cruise activities were related to business purpose.  

Documenting Travel Expenses

The most important part of the process of deducting travel expenses is to save all of your receipts. You don’t have to save paper copies, but you should be able to pull out a separate receipt (not just a line item on a credit card) to show (1) date (2) expense details (3) amount spent and (4) business purposes. Be as specific as possible.

Don’t forget that travel expenses must be, as stated by the IRS: “ordinary and necessary expenses incurred while carrying on your trade or business.”

Where to Show These Expenses

  • For sole proprietors and single-member LLCs, show these expenses in the “Expenses” section of Schedule C.
  • For partnerships and multiple-member LLCs, show these expenses in the “Deductions” section of Form 1065.
  • For corporations, show these expenses in the “Deductions” section of Form 1120.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.

How to deduct business expenses

How to deduct business expenses

Whether you are moving your business within your state or from state to state, you need to know what’s deductible and what isn’t.

The 2017 tax law (Tax Cuts and Jobs Act), suspended the deduction for moving expenses, effective with the 2018 tax year and going forward. The only exception is for active military personnel.  

For the purpose of this article, business moving expenses can be divided into two parts:

  • The business move itself, including the moving of all computers and peripherals, equipment, supplies, furniture, office equipment, inventory, and parts, and
  • The move of the owners to a new home, directly related to the move of the business.

Business Moving Expenses and Employees

The moving expenses described in this article are for business owners, not employees. For tax years 2018 through 2025, nonmilitary taxpayers (including any of your employees) can’t deduct certain moving expenses. In addition, if you reimburse employees for moving expenses, you must include the amount of those reimbursements as a taxable benefit to the employees.  

Business Moving Expenses You May Deduct

The cost of moving business equipment, supplies, and inventory from one business location to another is a deductible business expense, as are costs associated with the purchase or renting of a new location. Be sure to keep good records to substantiate all costs associated with this business move.  

Personal Moving Expenses to Start a New Business

Is your move is part of the process of starting a new business as a self-employed business owner? If so, you can deduct your personal moving expenses if you meet IRS guidelines. To be classified as self-employed, you can’t be the owner of a corporation, semi-retired (whatever that means), a part-time student, or work only a few hours each week.

First, your personal moving expenses must be “directly related” to a business move.

Second, you must pass both of these two IRS tests: the “distance test” and the “time test.”

  • The distance test. To pass the distance test, the IRS says, “your new main job location [must be] at least 50 miles farther from your former home than your old main job location was from your former home.” So, let’s say your former home was Canton, Ohio and you traveled 5 miles to get to your business. Your new business location must be at least 55 miles from Canton, Ohio, in order for you to deduct moving expenses.
  • The time test. To deduct personal move expenses for a self-employed person, you must work full-time at least 39 weeks during the first 12 months, for a total of at least 78 weeks in the first 24 months. Note that the work must be “full time,” depending on what is usual for your type of business in your area. For example, most dentists work four days a week, so that would be considered as the full time for moving expense deduction purposes.

Mileage associated with the business portion of your move is paid at the applicable mileage rate for that year for business travel.

What You May Not Deduct as Business Moving Expenses

You may not deduct moving expenses that are not directly related to the move of your business, and you may not deduct personal moving expenses that do not meet the IRS distance or time test.

The IRS regulations do not allow you to take a moving expense deduction and a business expense deduction for the same expenses. The IRS says,

“You must decide if your expenses are deductible as moving expenses or as business expenses. For example, expenses you have for travel, meals, and lodging while temporarily working at a place away from your regular place of work may be deductible as business expenses if you are considered away from home on business.”

Highlight these expenses for discussion with your tax advisor.

Meals are not deductible as a moving expense unless you can provide documentation that they were directly associated with the business move rather than your personal moving expenses. For example, if you followed the van carrying your business equipment to its new location and you directed the unloading, you may be able to deduct the costs associated with that trip as a regular business travel expense, including lodging and meals.

You may not deduct personal move expenses if you do not move within one year from the date you began work at the new location unless you can show that you were prevented from moving during that time.

This article and all information on this site presents general information and is not intended to be tax or legal advice. Refer to IRS publications for more details. Each situation is specific; refer questions to your tax advisor.

It is still possible to report business income and expenses on your taxes even if you do not have a business license. The expenses can be deducted if you were operating your business with the intention of making a profit as long as you had a license.

Table of contents

Can I Deduct Business Expenses Without An LLC?

Is it possible to deduct business expenses if I do not have an LLC or S-Corp?? It is still possible to deduct business expenses even if you are an individual. The revenue of any business can be deducted from ordinary and necessary expenses. In the case of a sole proprietor, the IRS will tax you as if you were the only owner.

What Can You Legally Write Off As A Business Expense?

Business expenses – Various federal, state, local, and foreign taxes can be deducted directly from your business income. The ordinary and necessary costs of insurance can generally be deducted as a business expense if they are related to your trade, business, or profession.

Do You Need To Register Your Business To Claim Expenses?

If you want to claim your expenses, you do not need to register your business.

Can You Deduct Business Expenses If You Are Not Self Employed?

Self-employed individuals are not the only ones who can deduct business expenses. Some unreimbursed business expenses can also be deducted by taxpayers classified as employees.

Can Business Deduct Business Expenses?

It is generally prohibited to deduct personal, living, or family expenses from your taxes. In contrast, if you incur a cost for something that is partly business-related and partly personal-related, divide it between the business and personal parts of the expense. There is a deduction for the business part.

Can Small Businesses Still Deduct Expenses?

In one year, business owners can write off the full cost of their business with the IRS’s assistance. A safe harbor election was conducted by the Minimis. Assets that cost less than $2,500 per item can be expensed by small businesses.

Are Licenses Tax Deductible?

No. It is not deductible to deduct the licence fees, even if it is a condition of employment. As a result, they are not deductible under subsection 51(1) of the Income Tax Assessment Act 1936 because they are private.

Can You Deduct Business Expenses From Personal Income?

The Internal Revenue Service allows self-employed individuals to deduct a large portion of their business costs, many of which are dollar for dollar. These business costs are incurred during the course of earning income. You can deduct costs if they are “ordinary and necessary” in your business or trade.

Can Illegal Businesses Deduct Expenses?

Section 162(c)(2) of the Internal Revenue Code prohibits the deduction of legal expenses incurred by businesses that are not allowed to operate. According to the Tax Court, legal expenses incurred in conducting that illegal business are deductible under section 162(a). The expenses were considered ordinary and necessary in nature.

Can You Write Off Purchase Of A Business?

A deductible contribution. The cost of purchasing a new business can be deducted up to $5,000. If you decide to buy the company, you can write off any research and investigation you do. In addition to surveying the market, product analysis and site visits can also be performed.

What Can Be A Tax Write Off For An LLC?

If an employee attends a convention or continuing education, a corporation or LLC can deduct the cost of travel, lodging, meals, and program fees. Business owners who are employed by the business are included in this category. Employees are not reimbursed for their expenses.

Can I Deduct Expenses For An Unregistered Business?

Are there any unlicensed businesses? Businesses that are not licensed under the Personal Income Tax Law are still subject to restrictions of IRC Section 280E, and may only deduct the cost of goods sold, not ordinary and necessary business expenses, as long as they are not operating as a sole proprietorship.

What Proof Do I Need For Business Expenses?

Sales slips, bills paid, invoices, receipts, deposit slips, and canceled checks are examples of supporting documents. It is important to include the amount paid and the reason for the expense in the documents. The Tax Code requires businesses to keep their records for as long as they need to.

Does The IRS Require Receipts For Business Expenses?

It is the business relationship between two parties. Entertainment, meal, gift, and travel expenses less than $75 are exempt from keeping receipts, canceled checks, credit card slips, or any other supporting documents. There are a number of ways to record the five facts you need to document.

Can You Claim Anything As A Business Expense?

It is necessary to include both ordinary and necessary expenses in a business expense. You can accept an ordinary expense in your business or trade if it is common. In the case of a business or trade, a necessary expense is one that is helpful and appropriate. There is no need to consider an expense to be indispensable.

Can I Claim Business Expenses Without A 1099?

The IRS recognizes that getting a business up and running takes time. It is possible that you will not earn an income in your first few months or years of operation. In some cases, you may be able to deduct expenses even if you do not have income.

Watch do you need a business license to deduct business expense Video

How to deduct business expenses

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You can write off most of your business expenses if the IRS considers them “ordinary and necessary.” Ordinary business expenses are the standard things companies in your industry spend money on. Expenses are necessary as long as they help you do your job. Business expenses reduce your gross income but you don’t subtract them on your 1040.

Schedule C

Sole proprietorships and partnerships are known as “pass-through” business structures. The company doesn’t pay tax: profits and losses pass through to you, and you report them as personal income or loss. Sole proprietors use Schedule C to report all business income and expenses, and partners use Schedule E. Legitimate expenses include office supplies, license fees, business travel and employee salaries. You subtract the expenses from your business income and report the result on your 1040.

Home Office

If you use your home as your primary place of business, you can deduct your home office expenses. For example, if your home office is 10 percent of your home, you can deduct 10 percent of mortgage interest and other expenses. You calculate this separately from your other business spending, using Form 8829. If your home use puts your business in the red, you can’t claim a loss on your 1040. You report zero income and roll the loss over as a deduction for next year.

Self-Employment Tax

If you earn more than $400, net, you have to pay self-employment tax, which covers both the employee’s and employer’s portion of Social Security and Medicare taxes. It runs around 15 percent. You can deduct roughly half the expense from your taxable income. Instead of taking it as a business expense on Schedule C or E, you report it as a write-off on your 1040.

Deducting Everything

When you calculate your gross income on your 1040, you include your business income along with wages, farm income, capital gains, IRA withdrawals and other income. By this point you’ve already deducted your business expenses, so you just write in the net business income. You report your self-employment tax write-off separately, as an adjustment to your gross income. If you pay for your own health insurance, you can write off 100 percent of the premiums as another adjustment.

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Knowing what travel business expenses are and how to deduct them can help lower total tax expenses and optimize travel costs. Regardless of the nature of your business trip, deducting your travel expenses can have a direct impact on its budget. Being familiar with how business travel expense deductions work is a valuable skill, but it requires research. In this article, we discuss what business travel expenses are, why they are important to track and tips for deducting them.

What are business travel expenses?

Business travel expenses are the necessary expenses of a person traveling away from their home for a reason directly related to their job, business or profession. In most situations, travel expenses occur when professional duties require a person to travel from the area they usually live and pay taxes in and go to another geographical area, for a period that’s longer than a day’s work and therefore requires them to sleep in the new location.

An individual’s “tax home,” as referred to by the IRS, is not necessarily where they reside, but rather where their job or main place of business is located. Also, it is only considered as travel if the person in question works at the new location for less than a year. If the work assignment lasts more than a year, it is considered to be a long-term assignment, rather than business travel.

Common business travel expenses

The most often-encountered business travel expenses are:

Direct travel costs, such as plane, train and bus tickets or car expenses. If the tickets were free or a gift, they can’t be deducted, as their cost is considered to be zero.

Local transportation, such as taxis from the airport to the hotel and from the hotel to the work location.

Costs of shipping personal baggage and business-related supplies, such as samples or display materials, from your regular location to your temporary address.

Costs of using your personal car while at the new destination, including gasoline, tolls and parking fees. Only the costs needed for professional reasons are considered to be business travel expenses. For example, if you drive to another city by car for a work assignment and you visit a friend living there, only the gas used to get to the work assignment and back to your accommodations count as travel expenses, whereas the gas used to get to the friend’s home is a personal expense.

Costs for temporary accommodations at the new location and costs of nonentertainment-related meals.

Laundry and dry cleaning expenses.

Any business-related calls taken during the trip, on any type of communication device.

All tips you pay for business-related expenses.

Other expenses that are solely related to your business travel, such as equipment rental fees and the gas you use between your accommodations and a restaurant.

Why is it important to track business travel expenses?

Some of the main reasons for keeping track of business travel expenses include:

It improves money management. Tracking travel expenses, and business expenses in general, helps a professional or a company know exactly how much they are spending and on what items. Monitoring cash flow can be very important for a business, as it makes it easy to monitor and keep a monthly budget, increasing financial awareness.

It expedites the reimbursement process for employees. In some situations, employees need to pay out-of-pocket for various expenses like meals and local transportation. Keeping track of receipts and submitting them in total will allow for easier verification and prompt reimbursement.

It is an important factor when calculating profit margins. By definition, profit is the difference between revenue and expenses. The net profit margin is an important metric for any business, and the only way to calculate it accurately is by knowing the total amount of revenue left after all expenses have been accounted for.

It keeps the company in good standing with the IRS. Constantly tracking all business travel expenses makes it easier to deduct them when tax season arrives.

How to deduct business travel expenses

Depending on how your business is organized, there are different ways to deduct your business travel expenses:

IRS sole proprietors and single-member LLCs file them in the “Expenses” section of the Schedule C tax form.

Partnerships and multiple-member LLCs file them in the “Deductions” section of Form 1065.

Corporations file them in the “Deductions” section of Form 1120.

Tips for managing business travel expenses

Consider these tips when tracking, organizing and reimbursing business travel expenses:

Decide on a payment method for employees

Employees on business trips have two main ways of paying for expenses: by using their personal funds and then submitting expense claims, or by using a company card or bank account. Regardless of the chosen payment method, employees need to have clear procedures for how they submit their expenses and how they get reimbursed, when applicable.

Constantly keep track of every expense

Organizing and tracking every receipt, expense report and invoice is an ongoing process that can significantly impact a company’s revenue. Business managers can do this either manually, by physically tracking all expenses, or by using special software to do this for them. In the long run, a company that constantly has business travel expenses can make it easier to track expenses by grouping them into several classifications, such as type of trip, travel costs, accommodation costs, food costs and other relevant segments. This makes it easier to analyze costs and optimize them when needed.

Estimate your business travel costs

After constantly keeping track of all business travel expenses, you can use the acquired data to make projections regarding future travel costs. Knowing how much you’re likely to spend, based on previous data, can help you optimize costs by identifying expenses that can be reduced. It can also help you plan ahead and organize future travel according to the organization’s budget.

Create an expense policy for employees

All employees who travel on behalf of the company should know exactly what is allowed to be considered a business expense. This eliminates the odds of potentially awkward situations occurring, such as an employee using the company card for something that can’t be marked as a business expense, or using their personal money for something that the employer can’t reimburse them for.

It might surprise you to learn that cosmetic surgery, in some instances, is an IRS-approved tax deduction. Don’t get too excited, though. Costs related to maintaining and changing your personal appearance are only tax-deductible in certain circumstances.

Clothing

Work clothing is a commonly rejected tax deduction. For clothes to qualify as a tax deduction, the attire needs to be in line with industry standards, and it needs to be essential to run your business. The basic rule of this deduction is that if you can wear the uniform or clothing outside of work, then you shouldn’t deduct it.

This can be a grey area, but here are some clothing expenses that can be deducted under the right circumstances:

A new suit or dress wouldn’t be tax-deductible because you could wear the attire outside of work.

Is dry cleaning tax-deductible?

The cost of dry cleaning is tax-deductible as long as the clothes are deductible too (only used for work).

Cosmetic surgery

Claiming the cost of cosmetic surgery as a tax deduction is almost always a no-go, but it has been done in extremely specific circumstances.

For example, an exotic dancer was able to claim the cost of breast augmentation on the grounds that her surgery was a requirement for employment (the surgery made her more successful in her profession) and that the surgery was unsuitable for day-to-day use (the augmentation was such that she was going to have her breasts reduced once her stage career was over).

The same line of thinking would apply to botox too. Generally, it would not be tax-deductible (unless you could prove it was for work and didn’t also help your personal life, which is unlikely).

How Bench can help

Surprised at the kinds of expenses that are tax-deductible? Personal appearance expenses are just one of many unexpected deductible costs that can reduce your tax bill. But with messy or incomplete financials, you can miss these tax saving expenses and end up with a bigger bill than necessary.

Enter Bench, America’s largest bookkeeping service. With a Bench subscription, your team of bookkeepers imports every transaction from your bank, credit cards, and merchant processors, accurately categorizing each and reviewing for hidden tax deductions. We provide you with complete and up-to-date bookkeeping, guaranteeing that you won’t miss a single opportunity to save.

Want to talk taxes with a professional? With a premium subscription, you get access to unlimited, on-demand consultations with our in-house tax professionals. They can help you identify deductions, find unexpected opportunities for savings, and ensure you’re paying the smallest possible tax bill. Learn more.

Body enhancement

The IRS doesn’t allow anyone to deduct the cost of simply staying healthy, but they will allow certain professionals to deduct expenses related to their personal appearance.

For instance, bodybuilders can deduct the cost of body oils and other products that they use to improve the appearance of their skin. Professional athletes can deduct the cost of sports coaching or training for events and competitions. However, athletes generally can’t deduct the cost of dietary or nutritional supplements because the benefits are personal as well as professional.

Makeup

The rules surrounding makeup as a tax deduction are strict. Similar to the clothing deduction, you can write off makeup used for stage or photo shoots, but not if you wear the same makeup outside of work. Any makeup purchases that are for photoshoots or shows should be purchased from professional suppliers (rather than the drugstore) if you plan to claim the cost.

Hair care and haircuts

Similar to makeup costs, hair care expenses only qualify as a tax deduction when they are specifically for work-related photoshoots or shows.

If you order your products from a professional supplier and only use them for performances or shoots, then you can claim the deduction. However, a haircut wouldn’t be deductible because you’ll take the new ‘do with you outside of work.

Salon expenses

By now, you get the idea. Salon expenses can only be deducted if it’s strictly for work. Unfortunately, you can’t get a mani-pedi and claim it’s to help you do better at the office.

What’s Bench?

We’re an online bookkeeping service powered by real humans. Bench gives you a dedicated bookkeeper supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business—for good. Your bookkeeping team imports bank statements, categorizes transactions, and prepares financial statements every month. Get started with a free month of bookkeeping.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

March 22, 2018

Law firm partners must sometimes pay for certain firm-related expenses out of their own pockets. For instance, your firm’s partners may

  • Have to personally absorb the costs of wining and dining prospective clients who are not on the “approved” firm-wide list of potential clients for which the firm will reimburse entertainment costs.
  • Incur personal auto expenses driving to and from client meetings and to and from other locations where firm-related business is undertaken.
  • Pay for some or all costs involved in continuing legal education out of their own pockets.

The list can go on and on. The good news is these unreimbursed business-related outlays can generally be deducted on the partners’ personal Form 1040 tax returns.

The ground rules: A partner can write off unreimbursed business-related expenses on his or her Schedule E (the same tax form where the partner’s share of partnership income is reported). To be eligible for this tax-favored treatment, however, the unreimbursed expenses must be of the kind the partner is expected to pay out of his or her own pocket per the partnership agreement or firm policy.In theory, the agreement or policy can be written or unwritten.

The Schedule E instructions direct the partner to report the deduction for unreimbursed expenses on a separate line below the line reporting the partner’s share of income from the firm. The deduction can be described as “unreimbursed partnership business expenses.”

Of course, if the expenses in question are for meals or entertainment, only 50 percent of the costs can be deducted on Schedule E. The partner should also include the deductible amount as an expense for self-employment tax purposes on his or her Schedule SE. That way the partner receives an SE tax benefit as well as an income tax benefit.

Here’s the problem: Partners cannot deduct expenses they could have turned into the firm and been reimbursed. In other words, there’s no deduction for “voluntary” out-of-pocket expenses (consistent with the principle that no good deed goes unpunished).

The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written policy that clearly states what will and will not be reimbursed by the firm. That way, your partners can deduct their unreimbursed firm-related expenses without running afoul of IRS rules.

Limited Deduction

In general, taxpayers can deduct only 50% of business-related meal and entertainment expenses. The 50% limit applies to expenses including

  • Traveling away from home (whether eating alone or with others) on business;
  • Entertaining customers at your place of business, a restaurant or other location;
  • Attending a business convention or reception, business meeting or business luncheon at a club.

– Source: IRS Publication 463,
Travel, Entertainment, Gift and Car Expenses

If you’re starting a new business, you can deduct up to $5,000 of your start-up costs and $5,000 of your organizational costs as allowable business expenses in the year your business begins. The costs that are eligible for business start-up tax deductions include market research expenses, marketing and advertising expenses, employee training and professional fees associated with establishing your business structure and organization.

Start-up and organizational costs are generally treated as capital costs for tax purposes. The IRS considers them long-term assets — you’re investing in the future of your business.

What this article covers:

  • What Are Some Start-up Costs for A Business?
  • Are Business Start-up Costs Tax Deductible?
  • How Much Start-up Costs Can You Deduct?

What Are Some Start-up Costs for A Business?

Start-up costs are expenses that you incur while starting a new business. Since all businesses are different, the start-up costs vary. However, some of the common expenses include:

  • Employee hiring and training
  • License and permits
  • Technological expenses
  • Borrowing costs
  • Advertising and promotions
  • Equipment and supplies
  • Interest charges
  • Insurance
  • Rent
  • Travel costs
  • Utility bills
  • Legal expenses

Are Business Start-up Costs Tax Deductible?

According to the Internal Revenue Service (IRS), start-up costs can be categorized into start-up costs and organization costs.

Following are three specific categories of business start-up costs that are eligible for tax deductions.

  • Creating a Business: The research costs incurred while creating a trade or a business includes costs for market and product analysis, feasibility studies, visiting potential locations, competitor analysis, examining the labor supply, etc.
  • Launching the Business: It includes setup costs for the business such as employee hiring and training, consultant fees, travel costs and advertising and professional fees.
  • Organization Costs: This includes expenses for setting up your business as a legal entity such as accounting fees, incorporation fees, director expenses, state and legal fees and expenses for conducting any organizational meetings. These costs must have been incurred before the end of your first tax year in business.

Business start-up costs are not just for one year. This is why these start-up costs, other than the amount you elect to deduct, are chargeable to a capital account and amortized over the life of the business.

They are outlined in detail in Chapters 7 and 8 of IRS Publication 535.

Not Eligible for Tax Deductions

  • Capital expenses such as buildings, vehicles and equipment are considered for tax purposes separately.
  • Expenses incurred before the business start date.
  • Expenses incurred for entering a certain type of business, such as real estate, are not deductible as start-up costs.

How Much Start-up Costs Can You Deduct?

For the first year of its operations, the IRS permits a start-up tax deduction of $5,000 for start-up costs and organizational costs.

If you have start-up or organizational costs over $50,000, your available first-year deductions will be lowered by the amount that you exceed $50,000. The remaining amount must be amortized.

For example, if your start-up costs are $52,000, you’ll only be able to deduct $3,000 ($5000 minus $2000) in the first year of business. The remainder is amortized.

Read time: 7 minutes

It’s tax season: With all of your receipts in hand, it’s time to start organizing them to file your tax return for your business.

Generally, individuals have to file their tax returns by April 30. However, if you, your spouse or common-law partner are self-employed, you have until June 15 to file your return. But be careful if you have a balance owing; the CRA begins charging interest on any unpaid amounts owing starting on May 1.

Corporations can choose any date for their fiscal year end. Taxreturns must be filed no later than six months after the end of each tax year for corporations.

What can I deduct for my business taxes?

Generally, all businesses can deduct from their income expenses that are incurred not only to make the business operational, but also to maintain that business once it is up and running.

The CRA has a list of the common business expenses that you can deduct.

The important thing is that the expenses must be incurred to earn the business income and they must be reasonable under the circumstances.

CRA’s Liaison Officer Service

“They must be supported by original invoices,” says Chantal Trépanier of the CRA’s Liaison Officer Service.

“There is a lot that you can claim. It’s about proportion and being reasonable.”

In terms of timing, the only restriction is that expenses incurred in a business’s fiscal year must be claimed against income earned in that year. There are wrinkles to this process relating to accounting methods (income or expenses secured in a fiscal year, but not actually paid until the following year, must be included, for example).

You can refer to the table below for examples of the main operating expenses you can claim when filing your taxes.

The main operating expenses you can deduct from your taxes

You can deduct expenses that preceded the operation of the business. However, you can only claim expenses if you operated the business in the fiscal period in which the expense was incurred.

You can deduct the cost of items that your business used indirectly to provide goods or services. For example, drugs and medication used in a veterinary operation, or cleaning supplies used by a plumber.

Tax, fees, licences and dues are deductible, but you can’t deduct club membership dues including initiation fees if the main purpose of the club is dining, recreation, or sporting activities.

You can deduct the cost of small items such as pencils, pens, stamps, paperclips and stationery. Do not include desks, chairs, filing cabinets and calculators because they are capital items.

For example, if your home is 1,500 square meters and your office is 300 square meters, your office is 20% of your home’s total size. That means you are able to deduct 20% of many home expenses as home office expenses on your tax return.

You can deduct some expenses for heat, electricity, insurance, maintenance, mortgage interest (or rent), property taxes and “other expenses.” Again, this must be proportionate to the actual space that you are using in your home for your business.

When it comes to deducting business expenses for repairs and maintenance, you can’t deduct the value of your own labour.

You can deduct gross salaries and other benefits, such as Canada Pension Plan and Employment Insurance premiums, you pay to employees.

In most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel.

You can deduct rent paid for property used in your business. For example, you can deduct rent for the land and building where your business is situated.

You can deduct management and administration fees, including bank charges incurred to operate your business. Bank charges include those for processing payments.

You can deduct interest incurred on money borrowed for business purposes or to acquire property for business purposes. Check the CRA website for limits.

You can deduct property taxes for the land and building where your business is located. Note that the property tax related to business use of work space in your home has to be claimed as business-use-of-home expenses.

You can deduct expenses for telephone and utilities such as gas, oil, electricity, water and cable, if you incurred the expenses to earn income.

You can deduct all ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business. Insurance costs related to your motor vehicle must be claimed as motor vehicle expenses.

You can deduct an account receivable that won’t get paid if you had already included it as income for the year.

You can deduct expenses for advertising, including advertising on Canadian radio and television stations and in Canadian newspapers. Digital advertising is also tax deductible.

Frequently asked questions about tax deductions for businesses

A: “You cannot deduct the clothing that you will wear. Any personal expenses are not deductible,” says the CRA’s Trépanier.

A: “Penalties such as fines and parking tickets cannot be claimed,” she says.

A: You have to determine the portion that is used for business and you deduct only that, Trépanier says.

A: You can claim the cost of your cleaning staff and your cleaning supplies for your business. If you operate your business at home, you can make these deductions if they are related to your work space, according to Trépanier.

A: It can be claimed 100% at your principal place of business. However, if it’s a home office, only a portion of the Internet can be claimed for its use in your work space. You have to evaluate the time that you use the Internet for your home business.

A: Record the total number of kilometres driven from Jan. 1 to Dec. 31 and calculate the number of kilometres you have driven for business reasons, recording the date, destination and reason for each trip. For example, if you have driven a total of 10,000 kilometres in a year and you have calculated that 1,000 kilometres were for business, you can claim a 10% deduction for the use of your car, Trépanier says.

A: Generally when a person has more than one office, only the main office can be claimed as a deduction, says Trépanier.

A: Keep your receipts at least for six years because they will be needed if there is an audit.

A: Some business owners overlook expenses that should be capital costs, Trépanier says. Deduct equipment over a number of years. For example, if you buy laptops for employees deduct this equipment over its lifetime. This yearly deduction is called a capital cost allowance (CCA).

Need more help understanding your tax obligations?

The Canada Revenue Agency offers a free Liaison Officer service to owners of small businesses and self-employed individuals with in-person visits and pre-arranged seminars.

A liaison officer can answer your tax-related questions, discuss common tax errors and explain best practices.

Vehicle costs are a legitimate, tax-deductible business expense . . . sometimes. Before you deduct that car or truck as a Section 179 business expense, make sure you understand the rules regarding deductible car and truck expenses.

For some small businesses, a company car isn’t a perk — it’s a necessity.

The IRS makes provisions for vehicle costs to be deducted as a legitimate business expense. Yet many business owners are ignorant about the tax handling of vehicle expenses and end up either paying too much tax or sending a red flag to IRS auditors.

According to the IRS, the purchase price, sales tax and improvement costs of a car or truck are classified as a capital expense. Capital expenses also include equipment purchases and are typically deductible as a depreciation expense on the business’ tax return.

However, Section 179 of the IRS code allows for special handling of certain capital expenses (including the acquisition cost of a business car or truck). Under Section 179, it’s possible for some capital expenses to be completely deducted in the year of acquisition.

Although Section 179 can be a legitimate way to deduct buying a car as a business expense, limits and restrictions sometimes apply. Here’s what you need to know if you plan on using Section 179 to deduct the cost of a vehicle purchase:

  • Section 179 lets you deduct the full amount of a purchased, leased or financed vehicle in the year of acquisition. Instead of depreciating the purchase over several years, you can deduct the full amount from your gross income in a single tax year.
  • The IRS clearly limits Section 179 vehicle deductions to the year the vehicle was placed in service – regardless of whether it was placed in service for personal or business use. If you convert a personal vehicle to a business vehicle in a subsequent tax year you can depreciate it, but you can’t claim a Section 179 deduction.
  • To qualify as a Section 179 vehicle, your car or truck must be used for more than 50% business purposes. If you use it for more than 50% but less than 100% business use, your Section 179 deduction will be prorated.
  • Businesses that lease or purchase less than $800,000 in business equipment qualify for Section 179 deductions. But the amount of your deduction is subject to limitations that change on a yearly basis. In 2010 the Section 179 deduction is limited to a total of $250,000.
  • To ensure full compliance with Section 179 rules, we recommend consulting with your tax preparer before you set your sights on a Section 179 vehicle expense deduction.

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Additional Resources for Entrepreneurs

You should know the IRS’s tax rules

Click here to review the best trucks of 2021, because it might just be worth your while for your business to buy a truck or SUV for tax purposes. There are a few things you should take note of first, however. These include the USA’s tax-deduction rule for vehicles, what Section 179 of the Internal Revenue Code entails for any car that has a gross vehicle weight of between 6,000 pounds and 14,000 pounds, and how to avoid depreciation recapture.

You should also be aware of which vehicles actually qualify for this type of tax incentive; because of the weight requirements, this would normally be a full-size truck or big SUV, not something light like a coupe or crossover.

Purchasing Vs Leasing

When should a business purchase a vehicle and when should it lease it instead? The general tendency is for large businesses to lease in order to avoid the administrative burden of having to deal with inventory management. This can be true if they run a large fleet of vehicles.

Small businesses tend to rather finance our buy outright. Keep in mind that small businesses are audited and screened and if your small business only brings in $35,000 per year, buying a truck or SUV with an MSRP of $85,000 over four years will probably set off alarm bells at the IRS.

Depreciation Recapture – And Avoiding It

Here, it’s also important to understand depreciation recapture. This is what the IRS calls their method of collecting income tax on a taxpayer’s gain upon selling an asset – provided this asset was an offset to the taxpayer’s ordinary income by way of depreciation.

Avoiding depreciation capture is, of course, an argument in favor of leasing. The rental installments can still be expensed under your business name. Once the lease period is over, you simply return the vehicle. The benefits are numerous:

  • You conserve capital. You did not spend a large amount upfront to acquire the vehicle.
  • You prevent losses. You suffer no loss when you sell the vehicle as you otherwise would have when selling a depreciating asset.
  • Maximum tax write-off. This is due to having written off 100 percent of the rental installments.
  • You avoid obsolescence. In the end, you don’t have an obsolete, old vehicle to deal with.
  • Positive cashflow. As long as the vehicle was an asset that actually generated revenues for your business, having written off the costs of acquiring and using the vehicle would have generated a positive cash flow, bolstering your business’s financial performance.

Doing Vehicle Tax Deduction Right

Remember, there are certain rules. The proportion of the write-off depends on the proportion of the vehicle’s business use and because it is basically impossible to use a vehicle 100 percent for business, you’re unlikely to be able to deduct 100 percent of its value.

So you have to keep a mileage log – if the business use is 70 percent, there will be a 70 percent deduction/depreciation schedule. Also, the vehicle must be bought new from a dealer. Up to $25,900 up-front depreciation is allowed for by the IRS and more than 50 percent of the miles driven must be for business purposes.

Vehicles That Qualify

Remember, only vehicles with a gross weight of more than 6,000 pounds qualify and you have to keep in mind that there might be models within the ranges below that fall below the threshold. Always check the vehicle’s gross weight.

Although some of the SUVs listed below weigh less than 6,000 pounds, all that’s important is that their gross vehicle weight should exceed 6,000 pounds. Currently, the standard mileage rate allowed by the IRS for expensing vehicles that fall under the 6,000-pound limit is 56 cents per mile (for business driving only). The list of over-6,000-pound SUVs includes the following:

  • Mercedes-Benz G-Class and GLS-Class
  • Audi Q7 3.0T Premium
  • Buick Enclave
  • Chevrolet Suburban
  • Lincoln Navigator
  • Lexus LX570
  • Cadillac Escalade and Escalade ESV
  • BMW X5
  • Land Rover Range Rover
  • Jeep Grand Cherokee
  • Ford Expedition and Expedition EL
  • Toyota Land Cruiser
  • Porsche Cayenne

These trucks also qualify, regardless of which engine options or drivetrain configurations you select at purchase time, or whether it is the top or base model:

  • Chevrolet Silverado 1500, 2500HD, and 3500 HD
  • Ford F-150, F-250, F-350, and F-450
  • GMC Sierra 1500, 2500HD, and 3500HD
  • Ram 1500, 2500, and 3500
  • Nissan Titan

Conclusion

It’s a lot to take in, but do some additional research and talk to your dealership. They have an incentive to sell you a truck or SUV and know what taxes you can claim on such business expenses.

You can depreciate over 90 percent of an SUV over four years for business use in comparison with a sedan that won’t get much over 30 percent. Keep in mind that you can deduct based on the cost of operating your vehicle if you prefer not to base it on mileage – but you can only choose one.

You might be surprised how much you can gain by writing off the expenses allowable according to tax laws when you buy 6,000-pound vehicles under your business.

Maybe I can help clarify. I want to know about the standard per diem meal expenses. What are the guidelines for taking that deduction per day or meal? Is it only allowed on overnight trips if you take the per diem? I know that I get 50% on all expenses if I keep track and detail each meal. Also, how would I enter that deduction on the meals page?

Would I just say “total per diem meals $x.xx” ?

I went to 20 different conferences throughout the year, some over night some all day, and some for just 4 hours or so. I ate each time I went.

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I want to deduct the standard per diem business meal expenses. What are guidlines, where would i input it? is it only for overnight trips?

No, it is not for overnight trips only. Most business-related meals are generally 50% deductible, if they are reasonable (not extravagant) and directly related to conducting current or future business. However, when entering this in TurboTax enter the full amount and TurboTax will deduct the 50% when it calculates your total expenses.

– Meals while traveling for business (alone or with business associates)

– Meals and entertainment expenses when you attend conventions, trade shows, business conferences

– Tickets, food, drinks for entertaining business associates at sporting events, shows, plays, concerts, nightclubsMeals for potential customers or clients (at home or out)

– Business meals at a club

– Meals during hunting, fishing, rafting, skiing or similar outings with business colleagues

– The cost of meals and entertainment for a business associate’s spouse (and your own, if other spouses are attending)

Note : Although you do not need receipts for meals and entertainment expenses under $75, it is important to keep good records documenting who, what, when, where and the business purpose of the meal or event.

While most meals and entertainment expenses for business are only 50% deductible, there are a few exceptions to this rule that are fully (100%) deductible.

TurboTax ask for these expenses after you enter meals and entertainment expenses that are 50% deductible.

– Cost of hosting charitable events and meals for the general public

– Meals, entertainment or recreational facilities provided to the public as a means of advertising

– Meals for children at a daycare facility (if you use the standard allowance for meals and snacks, and you are reimbursed for them, you can only deduct the portion of the standard allowance that exceeds the reimbursement).

To enter this in TurboTax:

  • Click on the Business tab
  • select “I’ll choose what I work on”
  • Click on Start/update next to “Business Income and Expense”
  • If you have already started entering information about your business, you will be taken to a screen that says “Here’s the business info we have so far”, on this screen click “edit”. If you have not yet started entering you business info, just follow the onscreen guide to start entering your business details and income.
  • On the screen that says “Your () Business”, scroll down to the “Business Expenses” section
  • Click on start/update next to “Other Common Business Expenses”
  • Scroll down to “Meals and Entertainment” and click start.

You may be able to deduct work-related education expenses paid during the year as an itemized deduction. To qualify for a deduction, your expenses must be for education that:

  1. Maintains or improves your job skills or
  2. Your employer or a law requires to keep your salary, status, or job.

The education must relate to your present work. Expenses that you can deduct include:

  • Tuition, books, supplies, lab fees, and similar items
  • Certain transportation and travel costs, and
  • Other educational expenses, such as the cost of research and typing

Self-employed business owners can deduct costs for their own education, subject to certain limitations in the same way as individual taxpayers.

To be deductible, you must be able to show that the education:

  • Maintains or improves skills required in your present work,” or
  • It is required by law or regulations for maintaining a license to practice, status, or job. For example, professionals can deduct costs for continuing education.

Your work-related education expenses is not deductible if it:

  • Is needed to meet the minimum educational requirements of your present trade or business, or
  • Is part of a program of study that will qualify you for a new trade or business.

You can find more information, and examples of what qualifies on the IRS website.

How to deduct business expenses

For some business owners, spending money on travel and entertainment is inevitable. You might need to take a business trip or decide to take a client out for lunch. Whatever your situation, you might be able to claim travel, meals, and entertainment tax deductions.

Travel and entertainment

You can deduct certain travel and entertainment expenses come tax time. Travel and entertainment expenses are costs you incur when you travel or entertain for business purposes.

You need to know the travel and entertainment policy. What expenses are covered under travel, and which are covered under entertainment?

Travel

You can deduct travel expenses if they are ordinary (common and accepted in your business) and necessary (helpful and appropriate for your business). When you need to leave your tax home (the area you primarily work in) to travel for business, you incur expenses related to transportation, lodging, and meals.

Publication 463 says you are traveling away from home if:

  1. You are gone from your tax home for more than an ordinary day’s work as a result of business
  2. You need to sleep or rest to meet the demands of your work while traveling

How to deduct business expenses

The type of deductible travel expenses depends on your business and circumstances. Here are some travel expenses you can deduct:

  • Transportation (e.g., airplane, train, bus, or car)
  • Lodging and meals
  • Cleaning (dry cleaning and laundry)
  • Tips related to deductible expenses

There is a 50% limit on deducting meals. You can only deduct 50% of your meal expenses. You cannot deduct your expenses for meals if they are lavish or extravagant.

You cannot deduct a spouse’s or dependent’s expenses. You might be able to claim a business tax deduction for an employee’s travel expenses if they are necessary to the trip.

If you have an expense that covers other types of costs, you must allocate the cost between each (e.g., your hotel includes breakfast).

You can only deduct business-related travel expenses. If you decide to stay longer for vacation, you cannot deduct the personal expenses.

Entertainment

Many entertainment expense deductions were repealed following the Tax Cuts and Job Acts of 2017 tax reform. However, there are still certain entertainment expenses you can deduct.

Under the tax law, you can deduct expenses for recreational, social, or similar activities if they are explicitly for the benefit of your employees (excluding highly compensated employees). This means you can still deduct 100% of your entertainment expenses for office holiday parties.

You can categorize a meal as a form of entertainment if you or an employee is present. Meal entertainment expenses are only 50% deductible. If you claim the cost of a meal as entertainment, you cannot also claim it as a travel expense.

Entertainment, amusement, recreation, or use of a facility or property are no longer deductible expenses. This means you cannot deduct expenses for taking clients out to sporting events. And, you cannot deduct tickets to qualified charitable events.

How to deduct expenses

To deduct travel, meals, and entertainment expenses, you need to keep accurate records. According to IRS Publication 463, you must submit records that show the amount, time, place, and business purpose of each expense.

Update your small business accounting books and hold onto documents like receipts. Keep records for three years from the date you file.

For example, you could have an expense report that looks like this:

Expense Amount Time Place Business Purpose
Travel $199.00 (hotel) / $40.00 (food) 08/09/2017-08/10/2017 Phoenix, Arizona To meet with Client X and discuss working together

If you are a sole proprietor or own a single-member LLC, you need to deduct your travel and entertainment expenses on Schedule C (Form 1040), Profit or Loss from Business. Partners use Form 1065, U.S. Return of Partnership Income.

C corporation shareholders use Form 1120, U.S. Corporation Income Tax Return. S corporation shareholders use Form 1120S, U.S. Income Tax Return for an S Corporation.

You need to make sure your accounting books are accurate. We’ll help you get there. Try Patriot’s online accounting software to track your expenses. We offer free, U.S.-based support. Get your free trial today!

This is not intended as legal advice; for more information, please click here.

No. But there is a small silver lining. The IRS in Publication 463 (Travel, Entertainment, Gift and Car Expenses) is very specific regarding deducting club dues and membership fees. Any club that is organized for pleasure, recreation OR other social purposes is not a deductible expense.

This also applies to any membership organization if one of its principal purposes is either to host entertainment activities for members or their guests, or to provide members or their guests with access to entertainment facilities (see below).

The club’s activities will speak louder than words. The purposes and activities of a club, not its name, will determine the deductibility of the expense. However, the IRS has specifically denied the deduction of country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. It doesn’t matter how many deals you sign on the 18th green.

A common retort among taxpayers is why can’t I consider the renting of halls and banquet rooms as entertainment. This too is denied. Typically, you cannot deduct any expense for the use of an entertainment facility. An entertainment facility is any property you own, rent, or use for entertainment. Prior creative deductions that were denied by the IRS include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.

Here’s the silver lining: the expenses you incur at the club while entertaining clients where you have substantial discussions related to business are deductible as meals and entertainment although the club dues are not. Do you see the distinction?

Of course professional organizations specific to your business are deductible. These include bar associations, chambers of commerce and other trade associations. Civic or public-service-type organizations, such as the Lions, Kiwanis or Rotary clubs may also be deducted. Again, you cannot deduct dues associated with an organization whose principal purpose is to provide entertainment facilities to its members, or to conduct entertainment activities for them.

Don’t forget that a deductible business expense must be ordinary and necessary for the operation of your business. So, while the club dues that you are thinking about deducting actually fit into one of the round holes above, it can’t be a square peg as it relates to your business.

How to deduct business expenses

If you’re planning to use your personal savings to launch a new business, you’ll be happy to hear that many of the costs you’ll incur are tax deductible.

In this article, we’ll go through what you can and can’t deduct during the startup phase of a business, to help you spend strategically and get a better return come tax time.

The business startup phase

Business startup expenses are categorized differently from standard business expenses. Distinguishing between the two depends on when the cost is incurred.

In the eyes of the IRS, you are technically in “startup phase” until you open up your doors for business, or until you start earning income from the business—whichever comes first. Your costs during this period are categorized as startup costs.

Once you have launched or made your first sale, costs are categorized as business expenses.

However, not everything can be claimed as a startup expense during the startup phase. First, we’ll look at what you cannot deduct, and move on the what you will be able to deduct during the startup phase of your business.

Here’s what you can’t deduct:

There is a limit to the amount of startup costs that can be deducted in the first year of business. If you incur over $50,000 in startup costs, your available first year deductions will be lowered by the amount that you exceed $50,000. For example, if you incur $52,000 in startup costs, you’ll only be able to deduct $3,000 in the first year of business ($5,000 minus the amount you exceeded $50,000).

After your first year, you can amortize the remaining costs over the following 15 years. Following this logic, if you exceed $55,000 in startup costs, you won’t be able to deduct any costs in the first year, and instead you’ll need to amortize all of your startup costs.

Here’s what you can deduct during the startup phase:

The total amount of costs incurred while starting your business dictates the amount you can deduct as startup costs. If your startup expenses stay under $50,000, then you can deduct $5,000 in startup costs during your first year of business.

Deductible expenses during the startup phase fall into two different categories, related to research and the actual formation of the business. Let’s take a look at the specific types of startup expenses that can be claimed:

Investigating the creation or acquisition of an active trade or business

Certain research costs can be deducted as startup expenses. These include:

  • Surveying markets
  • Product analysis
  • Visiting potential business locations

The cost of getting a business ready to run

You can also claim the following expenses as part of the set-up phase:

  • Employee training and wages
  • Consultant fees
  • Advertising
  • Travel costs
  • Incorporation or organization fees

What can I deduct if my business never launches?

Let’s say you put all of this time and money into getting your business ready to run, and something unexpected derails your plans. While you can’t get that time back, you can get some of your money back in the form of tax breaks.

Even if your business never launches, you may still be able to deduct the set-up costs incurred. This will depend on how specific your research was; for example, you can deduct personal expenses incurred while researching the creation or acquisition of a specific business on Form 1040 (Schedule A) under “miscellaneous expenses.”

But, if you conduct general research without having a specific business in mind and your research doesn’t lead anywhere, you won’t be able to deduct those investigation costs.

Whether you invested a lot or a little into your new business, being able to deduct or amortize the costs will reduce the impact on your own financial health. Having a clear understanding of what you can and can’t deduct while setting up a new business prepares you to make smart choices with both your taxes and your startup costs.

Do you have any further questions about what you can and can’t deduct? Do you have experience starting a business with funds from your personal savings? Share in the comments below!

How to deduct business expenses

Cameron McCool

Cameron McCool is the Content Manager at Bench, the online bookkeeping service that pairs you with a dedicated accountant and simple, elegant software to do your bookkeeping for you. He posts business and lifestyle advice for busy entrepreneurs on the Bench Blog.

How to deduct business expenses

Gas expenses for business driving are deductible when documented correctly.

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  • 1. IRS Mileage Log Requirements
  • 2. Are Expense Deductions Without Receipts Tax Deductible?
  • 3. Are Motor Vehicle Running Costs Tax Deductible?

Expenses related to use of your vehicle for business or other purposes, including gas, can be significant during the course of a year. The business-use portion of your driving, however, may provide you a substantial tax write off. Accurate record keeping is essential to validate these expenses, and ensure that you receive your maximum deduction and tax savings. However, the methods used to keep your records do not have to be complex, and can fit in with your normal day with minimal inconvenience.

Recording Business Use

At the beginning of each year, record the odometer reading of your vehicle. Keep track of the trips you take with the vehicle for business. Enter the beginning and ending mileage from your vehicle’s odometer for the trip, and calculate the total mileage for the trip from these numbers. In addition, write down the destination of your trip. Record the reason for the trip. You do not have to be too detailed in the reasons, writing “sales call” or “post office to mail items” is sufficient. Also, record the date and time of your trip.

Recording Expenses

Your expense record does not have to be complicated to capture all of the important information. Make an entry for each car related expense, including gas. Enter the date that the expense occurred, who the expense was paid to and the total amount of the expense. For gas-related expenses, you can enter the amount of fuel in gallons that you purchased. If you deduct the actual expenses of your car from your taxable income, you need to record all of your expenses, not just expenses that you think are business related. Keep all of your receipts to validate these expenses.

Methods

You can use a variety of methods to record your vehicle expenses and business mileage. Use a consistent method that is easily available to you. A small [notebook](https://society6.com/notebooks?utm_source=SFGHG&utm_medium=referral&utm_campaign=2389) kept right in your vehicle is effective. Keep a pen with the notebook so that you will always have a way to write down trips and expenses as they occur. A smartphone or tablet computer with a spreadsheet app is also easy to use and convenient for quick entries. Consider using the notebook for immediate recording, and transferring the records to a computer later.

Deductibility

Your gas, and other vehicle expenses, are only available as a write off if you choose to use the actual expenses method when filing. In addition, vehicle expenses are only deductible proportionately according to your business use, compared with personal use of the vehicle, as determined by your usage logs. If you use your vehicle 30 percent of the time for business, and you have spent a total of $3,000 on gas for the year, $900 of the fuel costs are deductible.

Standard Mileage Rate

Instead of deducting your actual vehicle expenses, you may be able to deduct a fixed amount per mile of business. As of 2013, you can deduct 56.5 cents per business mile of vehicle use. This is a simpler calculation to make than actual expenses and may yield a larger deduction depending on your total vehicle expenses. If you use five or more cars in your business at the same time, are a rural mail carrier or depreciated your vehicle using anything other than straight-line depreciation, you must use the actual expenses method for calculating your deduction. Use the standard mileage rate for calculating deductible, non-business uses of your vehicle as well, such as use for charity, moving or medical treatment. These types of use do not use the business mileage rate, but have their own deductible rates.

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Personal vs Business Expenses – Can I Deduct This?

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  • Expense Management

How to deduct business expenses

Knowing how to differentiate between your personal and business expenses can save you not only money on tax payments, but from any potential errors which might land you in trouble with the Internal Revenue Service (IRS).

If you’re an incorporated business, deducting expenses helps reduce your business taxes. If you’re a sole proprietor, it helps you decrease your regular income as well as your self-employment tax.

While the IRS offers both personal and business deductions, you must make sure that the business deductions are only related to your business.

How to deduct business expenses

What comes under personal deductions?

Personal deductions, aka personal exemptions, are items on which a resident taxpayer is entitled to claim under tax deductions. As per the IRS, these tax deductions include personal or family expenses such as medical bills and mortgage interest payments.

Expenses such as charitable donations as well as expenses incurred while volunteering with a charity also qualify as personal exemptions.

Likewise, losses sustained due to theft and vandalism, breastfeeding supplies, tax preparation fees, and legal fees associated with a hobby are some of the personal tax deductions you can claim. The IRS has a comprehensive list of personal deductions on their website.

What comes under business deductions?

As per the IRS, in order for an expense to be considered for business deduction, it must be both ordinary and necessary. In other words, it must be a legitimate business expense.

For example, expenses on business supplies such as office furniture, office computers and software used for running business qualify as business deductibles. Similarly, money spent on rent and advertisement for business is also deductible.

However, if you are a freelance professional and working from home, you can deduct expenses associated with the portion of your home dedicated to your work. You can simply measure the square footage of your whole house and the space used for business, and find the percentage thereof.

Employee salaries and expenses made on behalf of your business are generally written off as well.

If you’re not really sure about a particular expense, familiarize yourself with the IRS guidelines on deducting business expenses.

Be careful about calculating your items for tax write-off. Tax experts suggest being careful about approaching items – such as travel expenses, cell phone bills, home office rent, office computer – for business deductions.

Keep Your Personal and Business Expenses Separate

When it comes to calculating business deductions, it’s very important to keep your personal and business separate. While that sounds pretty easy on the surface, most people end up making a mess of their business expenses.

As a rule of thumb, expenses which are purely personal in nature – mortgage payment, home utility bills, movie/concert tickets etc – cannot be itemized as business expenses. If you try to manipulate the items, you might get away at first, but you’re going to be in legal trouble if the IRS picks you up for audit and you’re unable to justify the deductions.

As a result, not only will you lose the money from the tax deductions, but you’ll pay additional penalties as well. Moreover, depending on the severity of the evasion, things could also get much worse for you. It’s simply not worth the trouble. So be very careful about expenses itemized under business deductions.

As a side note, the Internal Revenue Service (IRS) has released its annual “Dirty Dozen” list of tax scams for 2016. It serves as a caveat for the taxpayers, warning them of the potential scams they should be careful about.

Items You Could Deduct from Your Taxes

As a small business owner, you want to be aware of the numerous tax-related terms and rules in order to best handle how to treat your business deductions. But, that’s easier said than done.

Here’s a list of items that can help you differentiate between what constitute a business tax write-off and what don’t.

What SMBs Can Write Off

  • Bank Service Charges
  • Consulting Fees
  • Advertising and Promotion
  • Accounting Services
  • Healthcare Costs
  • Home Office Deductions
  • Interest Expenses
  • Internet
  • Office Supplies
  • Rent
  • Software
  • Payroll Processing

What SMBs Can’t Write Off

  • Professional Accreditation Fees
  • Salary to Self as a Sole proprietor
  • Charitable Contributions of Your Home
  • Political Contributions
  • Penalties or fines you pay for breaking the law
  • Lobbying expenses
  • Federal income tax payments

Check out the full list of common small business write-offs here.

Final Thoughts

Separating personal expenses from business expenses is key to claiming legitimate business deductions. While filing business tax returns, be sure to claim only those deductions that are genuinely associated with your business operations. If unsure, you should turn to a professional rather than handle it yourself.

As a small business owner, how do you differentiate between your personal and business expenses with regards to claiming tax deductions? Please, let us know in the comments below.

How to deduct business expenses

Gas expenses for business driving are deductible when documented correctly.

More Articles

  • 1. IRS Mileage Log Requirements
  • 2. Are Expense Deductions Without Receipts Tax Deductible?
  • 3. Are Motor Vehicle Running Costs Tax Deductible?

Expenses related to use of your vehicle for business or other purposes, including gas, can be significant during the course of a year. The business-use portion of your driving, however, may provide you a substantial tax write off. Accurate record keeping is essential to validate these expenses, and ensure that you receive your maximum deduction and tax savings. However, the methods used to keep your records do not have to be complex, and can fit in with your normal day with minimal inconvenience.

Recording Business Use

At the beginning of each year, record the odometer reading of your vehicle. Keep track of the trips you take with the vehicle for business. Enter the beginning and ending mileage from your vehicle’s odometer for the trip, and calculate the total mileage for the trip from these numbers. In addition, write down the destination of your trip. Record the reason for the trip. You do not have to be too detailed in the reasons, writing “sales call” or “post office to mail items” is sufficient. Also, record the date and time of your trip.

Recording Expenses

Your expense record does not have to be complicated to capture all of the important information. Make an entry for each car related expense, including gas. Enter the date that the expense occurred, who the expense was paid to and the total amount of the expense. For gas-related expenses, you can enter the amount of fuel in gallons that you purchased. If you deduct the actual expenses of your car from your taxable income, you need to record all of your expenses, not just expenses that you think are business related. Keep all of your receipts to validate these expenses.

Methods

You can use a variety of methods to record your vehicle expenses and business mileage. Use a consistent method that is easily available to you. A small [notebook](https://society6.com/notebooks?utm_source=SFGHG&utm_medium=referral&utm_campaign=2389) kept right in your vehicle is effective. Keep a pen with the notebook so that you will always have a way to write down trips and expenses as they occur. A smartphone or tablet computer with a spreadsheet app is also easy to use and convenient for quick entries. Consider using the notebook for immediate recording, and transferring the records to a computer later.

Deductibility

Your gas, and other vehicle expenses, are only available as a write off if you choose to use the actual expenses method when filing. In addition, vehicle expenses are only deductible proportionately according to your business use, compared with personal use of the vehicle, as determined by your usage logs. If you use your vehicle 30 percent of the time for business, and you have spent a total of $3,000 on gas for the year, $900 of the fuel costs are deductible.

Standard Mileage Rate

Instead of deducting your actual vehicle expenses, you may be able to deduct a fixed amount per mile of business. As of 2013, you can deduct 56.5 cents per business mile of vehicle use. This is a simpler calculation to make than actual expenses and may yield a larger deduction depending on your total vehicle expenses. If you use five or more cars in your business at the same time, are a rural mail carrier or depreciated your vehicle using anything other than straight-line depreciation, you must use the actual expenses method for calculating your deduction. Use the standard mileage rate for calculating deductible, non-business uses of your vehicle as well, such as use for charity, moving or medical treatment. These types of use do not use the business mileage rate, but have their own deductible rates.

Business expenses are ordinary and necessary costs a business incurs in order for it to operate. Businesses need to track and categorize their expenditures because some expenses can count as tax deductions, resulting in significant cost savings.

Here’s What We’ll Cover:

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Can You Write off as Business Expenses?

Allowable deductions are ones that are considered by the IRS to be both “ordinary and necessary”.

Not all expenses a company incurs are tax deductible. Those that are may only qualify for a partial reduction. Some companies will need to ‘capitalize’ an expense. Capitalizing an expense refers to an expensive asset that a business invests in to generate revenue, but is also one that will depreciate over a number of years (like a building or piece of equipment). Capitalizing large expenses means only the depreciation amount of those items for that year will show up on a company’s income statement, unlike regular expenses which show the full amounts. This will allow a company to accurately assess their profits.

What Are Examples of Business Expenses?

Here are some common business expense examples that may be partially or fully tax deductible:

  • Payroll (employees and freelance help)
  • Bank fees and interest
  • Rent
  • Utilities
  • Insurance
  • Company car
  • Equipment or Equipment rental
  • Software
  • Furniture
  • Supplies
  • Membership dues (including union or other professional affiliations)
  • Commissions & Fees
  • Meals
  • Travel
  • Employee retirement plans
  • Employee education plans
  • Employee benefit programs
  • Subscriptions
  • Equipment rentals
  • Advertising
  • Office equipment
  • Legal fees
  • Maintenance and repair

If you operate a small business out of your home, you may be able to deduct partial expenses such as:

  • Home office space (as long as this is your main place of business)
  • Mortgage interest
  • Security system
  • Property taxes
  • Maintenance, repairs or upkeep
  • Business Phone line (separate from home line)
  • Insurance

Can Business Expenses Be Carried Forward?

Typically, a company’s financial expenses must be declared in the tax year the purchases were made. If the expenses missed were considerable and affected a company’s taxes, the company could then choose to file an amended tax return. This must be done within 3 years.

In addition, expenses that are considered to be capitalized costs (see above) will be carried forward, but the depreciation amounts will change every year. This is standard for a new company with a lot of expensive start up costs.

Can I Deduct Personal Expenses for Business?

No, one cannot deduct personal expenses for a business. The only exception is if the expense is used for both personal and business reasons. In that case, one can deduct the business part.

Let’s give an example. Take John, he’s self-employed and runs his own tax consulting business. He uses his vehicle 50% of the time to visit clients in their homes or at their place of business, and 50% of the time the vehicle is used for family or pleasure. The rules allow John to deduct the business part, but to back up this claim on his taxes he needs to track mileage and the purpose of each trip, or track gas, insurance, maintenance and repairs.

What Are the Three Types of Expenses?

There are three types of expenses:

Fixed

A fixed cost is one that does not change, or changes only slightly. An example would be the monthly rent a business pays on its headquarters.

Variable

Variable expenses vary from month to month and are typically a company’s largest expense. An example of a variable expense would be payroll for a company with a large amount of freelance personnel, or overtime expenditures.

Periodic

Periodic expenses are ones that happen infrequently. They can be hard to plan for, such as money needed for an unexpected machine replacement or repair.

How to deduct business expenses

How to deduct business expenses

Lea Uradu, J.D. is graduate of the University of Maryland School of Law, a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, Tax Writer, and Founder of L.A.W. Tax Resolution Services. Lea has worked with hundreds of federal individual and expat tax clients.

How to deduct business expenses

There are several ways to deduct business expenses from your small business revenue to lower your tax bill. In some instances, business deductions can reduce your revenue on a dollar-for-dollar basis. You can also deduct certain expenses incurred during the startup phase of your business, but the rules are not as straightforward as those for deducting operating expenses. To understand how business startup deductions work, you need to know which expenses are deductible and how to take them at tax time.

Key Takeaways

  • The IRS allows certain tax deductions for creating, launching and setting up a business.  
  • You can’t claim the startup costs if the business doesn’t take off and you aren’t able to start it.  

Allowable Business Startup Deductions

Starting a new business can be very exciting. Despite the fervor that accompanies a startup, there are certain costs associated with getting a new business running. You may be able to reduce the amount of tax you pay based on these expenses. The Internal Revenue Service (IRS) allows certain tax deductions in three specific categories of business startup costs:

  1. Creating the business: These are costs associated with investigating the creation of an active trade or business, including feasibility studies, market and product analysis, surveying the competition, examining the labor supply, travel for site selection, and other costs involved in creating a new business.
  2. Launching the business: This includes any costs associated with getting your business operational, including recruiting, hiring and training employees, expenses related to securing suppliers, advertising and professional fees. The costs for equipment purchases are not included, as they are depreciated under normal business deduction rules.
  3. Business organization costs: These are the costs of setting up your business as a legal entity such as a corporation, limited liability company (LLC), or a partnership can be included. These costs would include state and legal fees, director fees, accounting fees, and expenses for conducting any organizational meetings.  

There’s one thing you must keep in mind. You can only write off these expenses if you actually opened up the business. This means that any costs incurred from businesses that didn’t actually get off the ground don’t qualify for a deduction.  

How To Take Business Startup Deductions

Although you may be able to deduct certain startup costs associated with your business, limits may apply. Business expenses incurred during the startup phase are capped at a $5,000 deduction in the first year. This limit applies if your costs are $50,000 or less.   So if your startup expenses exceed $50,000, your first-year deduction is reduced by the amount over $50,000.

For example, if your startup expenses total $53,000, your first-year deduction will be reduced by $3,000 to $2,000. If your expenses exceed $55,000, you would lose the deduction entirely. You may then amortize the remaining expenses and deduct them in equal installments over 15 years starting in the second year of operation.

Claiming the Deduction on Your Tax Forms

If you choose to take the first-year deduction, it needs to be reported on your business tax form. That would be Schedule C for a sole proprietor, K-1 for a partnership or S corporation, or Form 1120 of a corporate tax return. In subsequent years, the amortized deduction is claimed on Form 4562, Depreciation and Amortization.  

The deduction is then carried over to your Schedule C under other expenses if you are a sole proprietor, or to your partnership or corporate income tax form. You can continue to claim it under other expenses throughout the amortization period.

When Should You Claim the Deduction?

The business startup deduction can be claimed in the tax year the business became active. However, if you anticipate showing a loss for the first few years, consider amortizing the deductions to offset profits in later years. This would require filing IRS Form 4562 in your first year of business.   You can choose from different amortization schedules, but once you have selected a schedule, you can’t change it. Consult with your tax advisor before making this decision.

Make sure you consult with a qualified tax professional or tax advisor before you make any decisions about claiming your startup costs.

What If You Don’t Start the Business?

If you spend money to research creating a business but then decide not to move forward, the expenses you incurred would be considered personal costs. Unfortunately, these expenses are not deductible. However, expenses incurred in your attempt to start a business could fall under the category of capital expenses, which you may be able to claim as a capital loss.  

The Bottom Line

Writing off business startup expenses is not nearly as straightforward as deducting business expenses. This is especially true once your business is underway. Although you might feel you know enough to navigate the process, it’s always a good idea to consult with a tax advisor who specializes in small business taxation. This person can help you overcome any obstacles so you get it right at tax time.

How to deduct business expenses

Can you tax deduct business lunches? In principle No, but maybe Yes.

How To Tax Deduct Business Lunches

It starts with a clear No but then there four back doors that allow you to tax deduct some business lunches nevertheless.

Tax Deductible or Not

Business expenses are tax deductible per s8-1 (1) ITAA97.

s8-1 (1): You can deduct from your assessable income any loss or outgoing to the extent that …(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

Entertainment expeneses are not tax deductible per s32-5.

s32-5: To the extent that you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under s8-1.

So it all depends on whether your business lunch falls under business or entertainment.

Entertainment

And you get a clear answer straight away. Not the one you want to hear. But a clear answer nevertheless. A business lunch is entertainment.

It starts with a vague definition in s32-10 (1):

Entertainment means (a) entertainment by way of food, drink or recreation and any transport or (b) accommodation or travel to do with providing entertainment by way of food, drink or recreation.

But then gets very specific in the note to s32-10 . A business lunch is entertainment.

These are some examples of what is entertainment: business lunches, social functions.

Even if you dicuss business or close a deal over lunch. s32-10 (2) removes any doubt.

You are taken to provide entertainment even if business discussions or transactions occur.

So up to this point business lunches are entertainment – there is no but, if or when – and hence not tax deductible. s32-10 is very clear on that.

Back Doors

But then higher forces relented and gave you a huge backdoor in the form of TR 1997/17. And three other ways out. If you get through one of these, you can still tax deduct your business lunches.

Backdoor #1 The 4W Test

TR 1997/17 is your best chance to qualify for a tax deduction. It allows you to tax deduct business lunches – or any other entertainment – if the expense passes the Why, What, Where and When test. We call that the 4W test.

If the answer to these four questions together — why, what, where and when – indicate that the dominant purpose of the lunch was business, then it doesn’t count as entertainment.

The Why and What carry the most weight, but the Where and When shouldn’t completely undermine your Why and What. The four answers should tie together and make sense.

WHY did you do it? For a social reason or business? Taking a client out to lunch is a solid business reason. Taking out a friend is not.

WHAT did you have? Was it purely functional or lavish? Sandwiches and coffee hint at a business meeting. A lavish four-course meal doesn’t.

WHERE did you do it? Lunch on business premises will help your cause. At a restaurant or café you need the When to back you up.

WHEN did you do it? During business hours supports your claim of a business expense. At night it doesn’t.

So if your business lunch ticks these 4 questions, it is not entertainment but a business expense. And so it is tax deductible and not subject to FBT either.

Backdoor #2 Sustenance

If the business lunch takes place on business premises and is reasonably simple without alcohol, the ATO will count it as sustenance and not as entertainment.

Think of a working lunch or late-night dinner consisting of pizza, sandwiches, muffins, biscuits or other finger food with water, orange juice, tea or coffee.

Since this doesn’t count as entertainment, you can tax deduct the costs – and don’t have to pay FBT.

Backdoor #3 FBT

If you pay FBT for an expense – any expense – then you can tax deduct that expense even if it is entertainment.

s32-20: Section 32-5 does not stop you deducting a loss or outgoing to the extent that you incur it in respect of providing entertainment by way of providing a fringe benefit.

So whenever you pay FBT for a business lunch, you can tax deduct that portion of the expense that was subject to FBT.

Backdoor # 4 Sudiv 32-B

And then there is another tiny door. Certain entertainment expenses are tax deductible thanks to the exceptions listed in Subdiv 32-B..

This subdivision allows you to tax deduct a business lunch if it falls under certain employer, seminar, promotion and advertising or other expenses. There is also a specific exception for businesses in the entertainment industry.

The list of exceptions is long with plenty of carve-outs. We only list a few that might be most relevant to a business lunch. So please google the actual section of ITAA 97 for more details.

If you provide a lunch in an in-house dining facility, that expense might be tax deductible per s32-30. The same might apply to food or drink that would be subject to FBT but is not due to certain exemptions in the FBT Act.

If you provide a business lunch at a seminar that lasts 4 hours or more, you can deduct these entertainment expenses per s32-35.

If you provide a lunch to promote or advertise your goods or services – a product lunch for example – you may be able to claim a deduction per s32-45, but only if ordinary members of the public have an equal chance to attend your event.

GST

If your lunch is tax deductible for income tax purposes, then you can also claim the input tax credit in your BAS. But if it isn’t, then you can’t

GST just follows what you do for income tax. Whatever is tax deductible as a business expense, gives you an input tax credit (as long as it is a taxable supply).

FBT

FBT uses the same definition of entertainment as income tax does in s32-10 ITAA97. So employees’ food and drink during a business lunch starts out as entertainment for FBT purposes as well.

If an employee attends the business lunch and that portion of the expense ends up being subject to FBT, then you can tax deduct that part of the expense no matter what. Whatever you pay FBT on, is tax deductible for income tax purposes per s32-20.

However, not all food and drink provided consumed by employees is necessarily entertainment. The 4W rule in TR 1997/17 also applies to FBT. So if a meal passes the 4W test, then the employee’s meals are not subject to FBT either. The same applies to sustenance.

Disclaimer: Tax Talks does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Remember, you can’t legally deduct a trip to the Bahamas in which you have a half day of meetings, then take five days of R&R on the beach sipping margaritas.

Business trips are often a necessary part of being an entrepreneur and business owner. But you don’t have to let these trips run your bank account dry. There are ways to deduct them, as long as you stay aware of certain legalities.

How to deduct business expensesShutterstock

In general, expensing a trip isn’t easy. You can’t just round up the family, book a stay at an all-inclusive resort and write the whole thing off. There are certain rules you have to follow. Specifically:

1. The trip’s primary purpose must be business.

It’s pretty much a no-brainer that the primary purpose of any trip you expense must be business, not pleasure. In other words, you can’t legally expense a trip to the Bahamas in which you have a half-day of meetings, then take five days of R&R on the beach sipping margaritas.

The rule of thumb is that the number of business days must outnumber any personal days. Travel days, however, do count as business activity, as does a weekend that’s sandwiched in between work on a Friday and Monday.

As entrepreneur Nellie Akalp explains, “If you fly to Florida on a Thursday, have a meeting on Friday, stay the weekend, meet with clients on Monday and Tuesday and fly home Wednesday, you’ve actually accrued seven business days. This means you could spend another six days in Florida as pure vacation and still expense your transportation expenses.”

2. Only your expenses are deductible.

It’s important to understand that you can only count expenses that you or a paid employee personally incur. While your spouse and kids can come along on your business trip, you can’t deduct their expenses. And don’t try to claim that they’re employees for the week! Many people have attempted this and the IRS looks at it with suspicion.

As for yourself, not everything can be expensed. The IRS approves travel and transportation, shipping of baggage and luggage, use of a rental car, meals, lodging and other “ordinary and necessary” expenses that may be incurred during travel.

3. Keep good records.

If the IRS ever decides to look into a business trip you’ve expensed, you want to make sure you have the records and documentation to back up your claimed expenses. That’s why meticulous recordkeeping is a must.

“You don’t have to worry about keeping a pocketful of receipts while you are away,” Akalp says. “The IRS doesn’t require receipts for a travel expense that’s under $75. However, just because you don’t need the actual receipt doesn’t mean you are off the hook for record-keeping. You still need to document all deductible expenses, including what you purchased, how much you purchased it for, and when.”

4. Don’t take risks.

Make sure you don’t take unnecessary risks. That’s the key to successfully expensing a business trip. It’s not worth making up an expense or breaking the rules just to save a few hundred dollars. If the IRS ends up finding something it doesn’t like, agents may open up a full-blown investigation and find other issues with your tax return. Just stick to the rules, and everything should be fine.

Three destinations to consider for your next business trip

1. Dubai

“Where skyscrapers rise from the desert floor and man-made islands, luxury yachts and towering golden hotels line the shores, you’ll find Dubai,” Trip.com notes. “Located at the heart of the United Arab Emirates along the Gulf on the eastern coast of the Arabian Peninsula, there’s nothing small nor understated about this former fishing village turned oil-rich city-state.”

In addition to its gorgeous scenery, Dubai has plenty of business conference centers and opportunities for entertaining clients, which makes it a solid choice.

2. Chicago

If you want to take a business trip and have some fun on the side, Chicago is a fantastic choice. It’s home to a number of industries and can easily be expensed on account of visiting clients. In your free time, be sure to check out some of the many tourist destinations.

3. Toronto

Home to Canada’s biggest financial services and manufacturing companies, Toronto is a huge North American business hub. It also offers business travelers good shopping, wonderful food and a diverse urban experience.

Enjoy your trip.

One of the wonderful things about being a business owner or self-employed professional is that you can set your own rules. If you want to choose where you take a business trip, do so. The key is to make sure you also stay above the tax rules when it comes to deducting business travel.

If you do so, you can get some work done and enjoy traveling the world without overpaying. Now, that’s a good deal!

How to deduct business expenses

Written By

Anna Johansson

Entrepreneur Leadership Network Contributor

Anna Johansson is a freelance writer who specializes in social media and business development.