Interest on loans by owners to buy their businesses are treated differently. Be sure to distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction. For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. Assuming you use the assets in the business, then your interest counts as deductible business interest.
If some assets include investments, then you may consider a portion of the interest as investment interest. You can count this as a personal deduction limited to the extent of net investment income. If some assets relate to a passive activity, such as rental realty, the allocable interest counts as passive activity interest subject to the passive activity loss limitation.
19. Employee Benefit Programs and Qualified Retirement Plans
You may deduct the cost of employee benefit programs, such as education assistance and dependent care assistance, as well as contributions to employees’ qualified retirement plan accounts.
For self-employed individuals, contributions to your own qualified retirement plan accounts are personal deductions claimed on Form 1040 or 1040-SR.
20. Mortgage Interest
Deduct mortgage interest if your business owns realty. The law caps interest on a personal residence. But no cap exists on the size of business loans on which interest can be claimed.
21. Office Expenses
Do you use flowers, fish tanks, magazine subscriptions and other items to spruce up your office? Office expenses are tax deductible.
Your tax activities in prior years sometimes yield write-offs in the present. You often can use past losses and any amounts you were unable to claim fully in a prior year, to cut your tax bill this year. For example, if you previously had a bad year, you may still have a net operating loss carryover that you can use to reduce your current taxable income.
Make sure to check prior year returns. Look for any unused amounts to carry over. Examples of carryovers include net operating losses, capital losses, charitable contributions, investment interest, and home office deductions that were previously subject to a taxable income limitation.
23. Bad Debts
Some businesses report on the accrual method of accounting and possess unpaid receivables or other debts. Businesses using the accrual method may take a tax deduction for any amount owed to you that’s partially or wholly worthless.
For example, if your business advanced money to an employee, customer or vendor, and you haven’t been repaid, you may be entitled to a bad debt deduction. If it is a business bad debt that becomes partially or wholly worthless, you deduct the amount as an ordinary business deduction.
24. Miscellaneous Business Expenses
Even if an expense doesn’t fit neatly into any of the categories listed above, you may still find it deductible as long as it’s “ordinary and necessary” for the business. Include items you pay out of petty cash. Examples: business and trade magazines you buy at a newsstand, coffee with a customer, or a taxi ride to a vendor. The key to deducting them is to have documentation. Suggestion: when you can’t obtain a receipt, take a photo with your smartphone (which is imprinted with the date) and maintain a log of miscellaneous expenses.
25. QBI Deduction
While a small business owner may take a personal tax write-off on a Form 1040 or 1040-SR, you base this on income from a pass-through entity. The qualified business income (QBI) deduction lowers the effective tax rate paid on business profits on owners’ personal returns. The deduction makes up 20% of QBI. But you may find limits to restrict or bar eligibility to claim any write-off. Read more: Qualified Income Deduction.
What Else Can I Deduct as a Business Expense?
Below are minor tax deductions that are often overlooked or that apply in limited circumstances.
Startup Costs – You can deduct up to $5,000 in startup costs and $5,000 in organizational costs (such as incorporating) incurred in your first year in business — but only if costs, in either case, did not exceed $50,000. Some startup entrepreneurs may elect to treat costs as capital expenditures (added to your investment in the business). But most elect to deduct these costs, up to $5,000. Any remaining amount is then amortized (deducted ratably) over a 15 year period.
Bank Fees – Fees you pay to maintain your business checking account, access the ATM, obtain new checks, and other banking fees are fully deductible. Review your bank statements to identify fees.
Membership Dues – You can deduct membership dues from professional and business-related organizations. Organizations include chambers of commerce, civic organizations, and trade associations.
Franchise and Trademark – If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense. Certain stipulations apply.
Cancellations – Things can go wrong, forcing cancellations of plans. For example, you may have booked a business trip and had to reschedule. The airline rescheduling fee as well as the hotel deposit you lost are deductible.
Credit card Convenience Fees – A small business that uses credit cards can deduct convenience fees charged by the card companies. A convenience fee is any non-standard use of a credit card for which the merchant charges a special fee. This might be a fee for accepting phone orders.
Education Expenses – Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. You can also deduct the cost of your own education related to your trade or business.
Moving expenses – You may be able to deduct moving expenses if you are a sole proprietor or self-employed and had to move more than 50 miles for business.
Internet – Generally, you can deduct internet-related expenses, such as domain registration fees and webmaster consulting costs for your company website.
Make sure to also check out NON-deductible expenses.
Can I Take the Standard Deduction and Still Deduct Business Expenses?
Yes, small business owners can claim the standard deduction on their personal 1040 returns, and also write off business expenses on Schedule C.
Now that the standard deduction amounts are higher, fewer taxpayers are itemizing deductions. Taking the standard deduction on line 9 of your 1040 return is becoming more popular.
However, the standard deduction is something completely separate from business expenses which are itemized separately on Schedule C.
Consult an Advisor
The information above gives you a general answer to the question “what can I deduct as a business expense”. However, tax deductions can be confusing and you will want to avoid the biggest tax mistakes. It is best practice to consult a CPA or other qualified tax preparer for what applies when completing your tax return.
IRS. “Sole Proprietorship Returns” https://www.irs.gov/pub/irs-soi/soi-a-inpr-id1905.pdf
IRS. “Publication 535 Business Expenses.” https://www.irs.gov/pub/irs-pdf/p535.pdf
IRS. “Publication 946 Depreciate Property.” https://www.irs.gov/pub/irs-pdf/p946.pdf