How to maximize business tax deductions

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.  

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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.

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‍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. 

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“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.

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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.

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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. 

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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.

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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.

1. Nevada
2. Ohio
3. Texas
4. 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.

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The table below shows a summary of notable corporate income tax changes for 2024 that business owners should be aware of:

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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.

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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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