- What are deductible business expenses?
- What are the key deductible business expense categories?
- Understanding the multi-state tax landscape in the United States
- Corporate income tax changes in some states for 2024
- Putting it all together
- Use Ramp to help track expenses
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Running a business invariably involves expenses, but savvy business owners understand that effectively tracking and categorizing these costs isn't just about organization —it also opens the door to significant tax advantages. Profitable business owners who ignore deduction techniques and do not maximize their allowable business expenses will undoubtedly pay more taxes than they would like to. States tax planning is also becoming increasingly important with many states implementing levels of tax reform after the Covid 19 pandemic.
In this guide, we'll dive into crucial categories of business expenses and clear up common misunderstandings about their deductibility at the Federal or state level. We'll also explore the shifting tax landscape in the United States, highlighting state-specific corporate income tax rates and the latest updates for 2024.
What are deductible business expenses?
A common misconception is the IRS has a running list of the only allowable business tax deductions. Rather, the IRS states that an expense must be both ordinary and necessary in order to be deductible. For one business owner, an expense may be ordinary, but not necessary while it may be both ordinary and necessary for another.
Understanding expenses is very important for businesses as they can strategically maximize these allowable expenses to reduce their taxable income. Business expenses are the costs incurred by a business during its day-to-day operations. Business expenses can be both deductible and nondeductible. Internal Revenue Code Section 162 governs what is considered deductible vs deductible.
“Deductions”, often referred to as business expenses, are costs subtracted from revenue to determine the taxable income which reduces the portion of income subject to taxation. Business expenses will never include personal expenses. Business owners that pay for personal expenses through their business will not be allowed to deduct these expenses and this can also affect their owner's “basis” in the entity, potentially leading to other tax consequences.
What are the key deductible business expense categories?
As aforementioned, there is no definite list of allowable expenses. The burden of proof of deductibility lies with the business owner, not the IRS. However, we often guide business owners to the common categories to determine if they apply to their business or situation.
Category of Deduction | Brief Description |
|---|---|
Advertising & Marketing | Costs associated with promoting the business, including web ads, TV ads, social media campaigns, and signage. |
Bank Fees | Monthly account fees, wire transfer fees, ATM fees, and merchant service fees linked to a business account. |
Business Meals | Expenses for meals during business meetings, conferences, or travel. However, only 50% of these are deductible under current law (2024). |
Business Use of Car | A common abused area, business owners should be aware that only the business portion of automobile expenses are deductible. |
Client Gifts | Gifts given to clients or customers as tokens of appreciation. There is a cap of $25 per gift for deductibility purposes. |
Continuing Education | Costs for further education or training benefiting the business. There are intricate rules for education to determine if it is deductible. |
Credit and Collection Fees | Fees related to obtaining payments from customers or third-party services for handling collections. |
Depreciation | Decrease in value of assets over time, including computers, furniture, property, equipment, etc. Depreciation is known as a “paper expense”. Business owners should work with a tax strategist to find ways to maximize their depreciation deductibles. |
Employee Benefit Programs | Health insurance, retirement plans, stock options, wellness programs, and daycare services provided to employees. Benefit programs have special rules depending on the entity structure and “controlled group” rules. |
Foreign Earned Income Deduction | The FEIE deduction is a lucrative deduction for business owners living abroad for at least 335/365 days. This is a complex deduction that should be discussed with a tax advisor. |
Insurance | Costs for property insurance, liability insurance, workers’ compensation, health insurance for employees, etc. |
Raw Materials | Cost of raw materials used in production for businesses manufacturing products. |
Rent | Lease costs for office space or other business premises. |
Travel | Expenses for business-related travel such as airfare, accommodation, meals, and car rentals. |
Software | Costs for business software like CRM, accounting (such as RAMP), graphic design, etc. |
Personal Property Use | Portion of costs for personal property used for business purposes. |
Entertainment | Costs for entertaining clients or employees is NOT deductible for tax purposes under the Tax Cuts and Jobs Act of 2017. Meals may be partially deductible but entertainment is not. |
Although these categories may vary depending on the specific nature or industry of the business, the table above outlines some common expense categories encountered by many businesses.
By freeing up capital that would otherwise be allocated towards income tax, businesses have additional funds available for further investments in growth initiatives (such as employees or new locations), research and development, employee training, and other activities. Deduction-based tax planning is considered the “blocking and tackling” of tax strategy that all business owners should look to maximize.
Understanding the multi-state tax landscape in the United States
While most tax strategies are focused on Federal tax reduction, business owners cannot overlook the state tax intricacies. State-specific corporate income tax rates are common and can significantly impact businesses' financial strategies. The majority of states “conform” to the Internal Revenue Code, but some states only partially conform, meaning some deductions (and credits) differ at the state level.
Business owners may be surprised to learn that states not known for high taxes have some of the highest corporate tax rates. Personal tax rates get most of the attention but business owners structured as corporations need to be aware of the drastic differences with state corporate tax rates.
As an example, Minnesota imposes the highest corporate tax rate, while on the other hand, North Carolina's flat rate of 2.5% is the lowest in the country.
State | Top Statutory Corporate Tax Rate |
|---|---|
Minnesota | 9.8% |
Illinois | 9.5% |
Alaska | 9.4% |
North Dakota | 4.31% |
Missouri | 4.0% |
Oklahoma | 4.0% |
North Carolina | 2.5% |
Additionally, the following states forgo corporate income taxes and instead impose gross receipts taxes which can be a surprise to new business owners. Business owners that are not yet profitable may still have tax obligations in these states based on the gross receipts within the state.
- Nevada
- Ohio
- Texas
- Washington
Corporate income tax changes in some states for 2024
State governments have been changing corporate tax laws since the Covid pandemic due to various budgetary issues. Some of these changes took effect on January 1, 2024, in states such as Arkansas, Iowa, Kansas, Nebraska, New Jersey, and Pennsylvania.
The table below shows a summary of notable corporate income tax changes for 2024 that business owners should be aware of:
State | Overview |
|---|---|
Arkansas | Arkansas reduced its top marginal rate from 5.1% to 4.8% for 2024, continuing its trend of enhancing tax competitiveness. |
Iowa | Iowa's top marginal corporate income tax rate decreased from 8.4% to 7.1% in 2024, contributing to improved tax competitiveness. |
Kansas | Kansas implemented a reduced statutory rate of 3.5% and a top marginal rate of 6.5% for businesses with taxable income exceeding $50,000. |
Nebraska | Nebraska's top marginal corporate income tax rate dropped from 7.25% to 5.84% as part of its phased reduction to a flat 3.9% by 2027. |
New Jersey | New Jersey's top marginal corporate income tax rate decreased from 11.5% to 9% in 2024 after the expiration of a temporary surcharge. |
Pennsylvania | Pennsylvania's corporate net income tax rate decreased from 8.99% to 8.49% in 2024. |
Putting it all together
Understanding business expenses and how they affect business taxes is important for predicting cash flow. Business owners can get a leg up by staying updated on changes in tax law and changes in state-specific items. Business owners who work with tax strategists throughout the year should find a higher return on investment than business owners who simply submit information for tax preparation. This approach allows them to optimize tax deductions, ensure compliance with state tax laws, and reinvest these tax savings into the business.
Use Ramp to help track expenses
Ramp helps businesses maximize tax deductions by automatically tracking and categorizing expenses in real-time, ensuring that all deductible expenses are accurately recorded. Rather than chase down employees for receipts and expense reports, Ramp serves as your business' source of truth for keeping track of expenses. See a demo of Ramp today.
The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.Also needs disclaimer
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