There are many types of business-related expenses that are deductible for business owners. When an expense is deductible it reduces profit, which in turn reduces your tax liability. While it’s a good idea to keep expenses as low as possible to maximize profit it’s also important to understand how business expenses affect your tax situation.

Below is a graphic that lists some of the most common types of business expenses. But first, there are some guidelines that you should be aware of.

Ordinary & Necessary

All expenses must meet the IRS definition of ordinary and necessary to be deductible. What does that mean? Well, there are some expense types that might be deductible for one business and not another.

For example, let’s take a pair of hair cutting scissors. This would qualify as ordinary and necessary for a hairdresser or hair salon owner. However, it would not pass the same test for an advertising firm or business consultant.

Business Purpose

As well, for an expense to be deductible it must have a business purpose. Using the same example as above, hair scissors would have a business purpose for a hairdresser but not a business consultant.

Another example is meals. This one can become complex. For a meal to be deductible, it must include at least one other person and it must have a business purpose. If you go through the drive-through on your way to the office, don’t even think about trying to deduct it. However, if you take a client to lunch to discuss their account, it could be deductible up to the 50% maximum allowed for meals meeting the IRS definition. (There are some exceptions for meals during business travel.)

Keep in mind, the below list is the most common for most business types. Each industry will have specifics unique to their operations. A baker would have ingredients, a creative would have craft supplies and a landscaper would have equipment.

Don’t forget to keep your receipts. Currently, the IRS requires a receipt to back up any purchase of $75 or more. Electronic copies do satisfy this requirement. Don’t lose out on deductions because of sloppy record-keeping!

If this article was helpful, leave a comment. To learn more on small business topics be sure to check out our guidebook, “Becoming a Sensible Business Owner”.

~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters.

Common expense info 2021.22

The article is for informational purposes only and should not be construed as business, accounting, tax, or legal advice. Details are subject to change without notice.

Each business’s tax situation is different, be sure to consult with your tax professional on your specific tax plan.