What can be written off as a business expense?
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A tax write-off is an expense incurred in the course of business that can be deducted from a company’s taxable income. Also known as a tax deduction, it can come in many forms, but some general categories of expenses that can be written off are:
- Business travel
- Marketing and advertising
- Office operations
- Employee compensation
- Professional fees
- Rent or mortgage
What are some common tax write-offs?
There are many expenses that can qualify as tax write-offs, but some common examples include:
- Office supplies
- Business trip accommodations
- Legal fees
- Utility bills
- Employee health insurance
- Worker training programs
- Insurance premiums
- Business dinners
How do these tax write-offs work in specific business scenarios?
As there are many expenses that can qualify as tax write-offs and many different types of businesses that can benefit, we’ve highlighted some example scenarios below:
1. The owner of a small paper and office supplies company can write off its employee benefits program and 401k contributions. The employer can also claim its rent payments for the office and warehouse space as tax deductions. The same goes for the depreciation of any machinery used to move the products and the cost of shipping. The owner can do a tax write-off for the costs of flights, accommodations, or vehicle expenses for any salespeople who travel to their customers.
2. A freelance reporter who works from home can claim a portion of their house-related expenses like Wi-Fi costs, rent, or mortgage as a tax deduction based on what percentage of their living space is used exclusively as a workspace. They can write off fees paid to accountants, lawyers or other professionals in the course of their work and subscriptions to resources for their reporting, like certain publications or research services. The cost of their computer and any necessary maintenance is also an eligible write-off.
3. Another scenario is a small consulting firm. The owner of the business can write off expenses related to marketing their services, including headshots, business cards, the company website, and any advertising campaigns. They might also claim their liability insurance, banking fees, and bills for the phone they use to conduct business. The consulting firm owner can write off the costs of attending conferences and networking events to broaden their reach and any work-related travel to visit clients.
What can't be written off as a business expense?
Although the list of things that can be written off as a business expense seems infinite, there are plenty of expenses that you cannot claim. Attempting to do so can lead to big problems, especially if your business is audited. Below are some expenses and expense categories you can't write off.
- Personal expenses.
You can't write off things that are considered personal expenses. That might include the cost of haircuts and grooming or of your work attire (with the exception of specific branded uniforms or safety wear). Your personal cell phone, home improvements unrelated to business, groceries, and household supplies are also non-deductible personal expenses.
- Commuting costs
Your regular commute to and from work in your personal car or via public transportation is also not a deductible expense. However, you can claim the cost of traveling to see a client or to another business-related location during the workday.
- Fines or penalties
You cannot claim the costs of work-related penalties or fines. Examples of these would be late fees on tax returns or parking or speeding tickets incurred in the course of doing business.
- Gifts above the limit
The IRS allows a maximum deduction of $25 for business-related gifts. So if you spend more than $25 in gifts to clients, you can't claim the excess amount above the legal limit.
- Political contributions
Even if your decision to donate to a particular politician or lobbying group is motivated by how they might benefit your business, you cannot write off political contributions.
How can you write off business expenses on your taxes?
To write off business expenses on your taxes, be sure to keep accurate records with documentation of all deductible expenses and be prepared to back up what you claim on your annual tax return. The forms and processes for writing off expenses vary by business structure.
A sole proprietorship is an unincorporated business that is owned and run by one person and is not a separate legal entity from that person. As a sole proprietor, you do not need to file separate business taxes but instead report your business income and claim deductions on Schedule C attached to Form 1040 (what you use to file your personal tax return).
A partnership is a formal arrangement between two or more parties to conduct a business and share its profits and losses. In the case of this business structure, the IRS requires that you file a Form 1065, and each partner must submit a Schedule K-1 breaking down each partner's share of the business's income and deductible expenses.
A corporation is a business entity seen as separate from its owners for both legal and tax purposes. Although C Corps and S Corps are different types of corporations, the IRS requires both to file Form 1120 to report the company's income, deductions, and other relevant financial information.
Depending on the business structure, a limited liability company, or LLC, can be treated as a corporation, partnership, or "disregarded entity" (meaning a single-owner business that elects not to be separate from its owner for tax purposes). The tax process for the former two business structures is laid out above, and in the case of a disregarded entity, the LLC's taxes would be filed like a sole proprietorship.
Writing off expenses without business income
If you're not making income, writing off your expenses can still be advantageous. While generating income isn't an absolute requirement, the IRS simply requires that you operate with the genuine intent to make a profit. Doing so will allow you to claim tax deductions.
Moreover even in the absence of income, investing in certain expenses, such as marketing or research and development, can be beneficial to your business's long-term growth and success. This strategic distribution of assets sets your company up for potential income in the future.
How can you maximize tax deductions for your business?
Maximizing tax deductions is a common goal for business owners, and there are steps you can take to do just that.
- Familiarize yourself with the intricacies of tax deductions, including the many categories of write-offs that go overlooked. In addition to familiar options like rent, utilities, and employee benefits, there are also deductible expenses like headshots, social media marketing campaigns, and the depreciation of business-related equipment over time.
- Tax laws frequently change, so do your best to keep up with any updates. You may well find new deductions that apply to your business.
- Track your expenses accurately. Maintain up-to-date records of all your business expenses and categorize them accordingly. Consider hiring a bookkeeper or using accounting software to help automate your expense categorization and tracking.
How can you manage your business expenses with Ramp?
Ramp's expense management system saves business owners precious time and money by automating the process for tracking spending. Our platform generates regular reports to provide a useful view of your company's current financial picture, spending history, and future projections.
Ramp also makes it easy to categorize all of your business expenses and identify those that can be written off come tax season. Using a centralized system also allows you to easily locate the receipts or other documentation behind any deductions in the event of an audit. In addition to streamlining the process, these tools help keep things more accurate by cutting down on the possibility of human error in accounting.
Learn more about Ramp's expense management tools.