Small Business: What Is, and Isn’t, Tax Deductible

entrepreneur-593357_640No matter what type of business you run, you will incur expenses. The good news is that most business expenses are tax deductible, which reduces the amount of income tax and self-employment tax you might owe over the course of a year.

Most business owners know that self-employment tax can be a killer. Unlike employees who work for someone else, the self-employed business owner has to pay both the employee and employer share of Social Security and Medicare tax to the federal government.

Self-employment tax is currently at 15.3% on a federal level, but according to the IRS, if you earn less than $400 (net) for the year, you do not have to pay self-employment taxes. This is composed of 12.4% Social Security tax on the first $118,500 of net self-employment income, and a 2.9% tax for Medicare on all self-employment income. Self-employment taxes on a state level will vary depending on where you live.

Did you notice how that said “net self-employment income”? This means that business owners are charged self-employment tax on their income after deducting business expenses.

But what is, and isn’t, tax deductible for business owners? Let’s find out.

Expenses that Are Tax Deductible

According to the IRS, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”

Some of the most common business expenses that are fully deductible against business income include:

  • Accounting fees
  • Advertising
  • Bank charges
  • Contract labor
  • Delivery charges and postage
  • Employee benefit programs
  • Internet subscriptions, domain names, and hosting
  • Office expenses and supplies
  • Print and copy
  • Professional development
  • Rent
  • Salaries and wages
  • Software
  • Taxes
  • Telephone
  • Travel

Expenses that Are Partially Tax Deductible

There are some business expenses that are only partially tax deductible. Usually these are expenses that are split between personal and business use, like use of your personal vehicle.

If you use your vehicle for work purposes and personal purposes, you must keep track of how much use is for business. Only that portion of use will be tax deductible. This is done by tracking the mileage you drove for business related purposes. You are not able to deduct both mileage and gas expense, it’s either one or the other.

Other expenses that are partially tax deductible include:

  • Gifts
  • Home office space
  • Meals and entertainment

In general, gifts are deductible up to $25 per person per tax year.

The Home Office Deduction is one that business owners tend to skip over when searching for tax deductible expenses. John McCarthy, Founder and President of McCarthy Financial Planning explained that this is a deduction worth checking out.

“I would encourage business owners to check out the Home Office Deduction if they have shied away from it in the past due to complicated rules. The IRS has eased compliance in this area and now offers a simplified method of deducting your home office,” McCarthy said.

Business meals and entertainment are generally deductible at 50% of the cost.

Expenses that Aren’t Tax Deductible

There aren’t too many business related expenses that are 100% not deductible. But things like dues and membership fees for social clubs, contributions to political parties and candidates, lobbying expenses, and penalties and fines are never tax deductible.

Eric Nisall, a personal and business accountant, also reminds his clients that clothing isn’t generally a deductible business expense.

“Clothing isn’t a deductible expense unless it is specific to a particular profession (not suitable for general wear outside of the workplace—think security guard uniform) or is embroidered with a company logo,” Nisall said.

Figuring out what is, and isn’t, tax deductible when you own your own business can be difficult. Make sure you seek advice from a tax professional and definitely reference the IRS Self-Employed Tax Center

Have you completed your 2015 taxes yet?

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