39 Business Expenses You Need to Track
The first rule of business tax deductions is that your expenses must be “ordinary and necessary.” You can dive into the IRS’s playbook to get a deeper understanding of what they mean by those terms, but the definitions break down like this:
- Ordinary - An expense that’s common and accepted within your industry.
- Necessary - An expense that’s helpful and appropriate for your business or trade. It’s important to note that it doesn’t need to be considered indispensable to be deemed necessary.
While you can argue that everything that you’ve spent on your startup is absolutely essential, not everything on your list will be 100% deductible.
There are definitely some common expenses that almost every business owner can claim. However, there are some that only apply if you’re a sole proprietor, working from home, just starting your business, or looking to grow.
Basic expenses for everyone:
Regardless of the size of your company, you should be tracking the following common business expenses, as they're the most frequently claimed deductions:
- Rent/Mortgage Payments
If you rent office space, or commercial space for inventory storage, it’s deductible.If you have a commercial mortgage, or have taken out a loan for business improvement/expansion, only the interest will be tax-deductible.
- Salaries & Other Compensation
Employee salaries, gross wages, commissions, bonuses, and any other forms of compensation count as a tax-deductible expense. The only caveat is that the amounts paid should be considered reasonable.
- Office Expenses & Supplies
Any office supplies that are purchased for the needs of the office can be deducted. This can include cleaning products, paper, stationary, envelopes/packaging materials, writing materials, and even snacks and drinks.The office expenses category covers costs related to the operation of your business, such as software, hosting, etc.
- Telephone & Internet
Whether it’s for commercial space, a home office, or cell phone plans, you should definitely include telephone and internet costs in your deductions.
If you’re listing expenses for a commercial space, then costs like electricity, internet, sewage, trash, water, A/C, etc. are all fully deductible.
If you’re working from a home office, then you can deduct a portion of these costs, based on the percentage of your home that’s being used for the business.
- Credit Costs & Fees
Since you pay interest on any borrowed money or lines of credit, such as a business credit card, you can claim that interest as a business expense.
- Bank & Collection Fees
Any banking fees on business accounts, such as minimum balance fees, overdraft fees, business transaction fees, payment processing fees, etc. can be used as tax deductions. Just make sure you're using a dedicated business bank account.
Otherwise, it could be difficult to maintain accurate records of what you're spending from your business finances, and what should be coming out of your personal finances.
- Dues & Subscriptions
Any subscriptions to relevant industry publications can be deducted.
All membership fees to professional or trade associations that help promote your business can be deducted as well.
You can deduct premiums for business-related insurance, such as malpractice, real estate, workers’ compensation, and business liability insurance.
However, when it comes to car insurance, there are 2 ways to report these expenses for a deduction.
- Standard Mileage:
If you use the same car for business and personal needs, you’d base your claim on mileage. In 2020, the rate was $0.575 per mile. On the plus side, tolls and parking fees are fair game.
- Actual Vehicle Expenses:
This includes premiums, repairs, depreciation, gas, lease payments, tires, and tolls/parking fees.
- Standard Mileage:
- Maintenance & Repairs:
This applies to your workplace, equipment/machinery, and your fleet of vehicles, if you require one for your business.
- Employee Benefit Programs
Payments made towards benefits for you and your employees, such as disability insurance, life insurance, dependent care assistance, and health plans are tax-deductible.
- Postage & Shipping
This includes stamps, freight, postage fees, and prepaid shipping fees on returns.
Ink cartridges, printers, or printing services that you’ve contracted are all eligible business expenses.
As long as it’s business-related, you can claim travel expenses. This includes flights, hotels, and meals.
If you’re travelling for an interview, those costs can also be included.
- Website & Software expenses
While website and software expenses could be included with your office expenses & supplies, you can also deduct it separately.
Any hosting, bookkeeping software, or SaaS subscriptions used for business purposes, are tax-deductible.
- Furniture, Equipment, & Machinery
Any business purchase that is expected to last longer than a year is considered a business asset, rather than an expense. This would be items such as desks, laptops/computers, machinery, and POS systems.
Deductions for these items are treated differently. You can either deduct the entire cost of the asset in the year it was purchased, or you can deduct the cost of its depreciation.
- Advertising costs, both online or offline
The cost of items and services purchased to directly promote or market your business can be claimed. This can be fees paid to an advertising agency, and the marketing they do on your behalf. It could also be anything that you personally spend to promote your business.
- Continuing education
Are you taking courses that can further your education or applicable skills in your industry? Tax-deductible items include: relevant materials, books, registration fees, course fees, as well as reimbursement payments made to employees, for their own relevant educational expenses.
- Events, promotions, trade fairs, etc
Hosting events and attending conferences or trade shows are a cost of doing business. This can be claimed in addition to your travel, accommodation, or food expenses.
The following expenses also qualify as deductibles.
- Business Meals
For business meals, only 50% of the cost of food and drink is deductible, and it has to be related to your business.
- Business Use of Your Car
Alternatively, if it’s for both business and personal, then you can claim the mileage related to the business uses.
For large items, such as machinery or a vehicle, you can deduct depreciation of its lifetime value, rather than deducting its entire cost during a single tax season.
- Charitable Contributions
Any charitable contributions made to eligible organizations are tax-deductible.
- Foreign Earned Income
If you're based abroad, you might be able to leave foreign earnings off of your tax return, provided you meet the requirements. This is known as the Foreign Earned Income Exclusion.
- Client Gifts
These could be gift cards or holiday baskets for clients, vendors, or even employees.
- Child/Dependent Care
Qualified costs relating to child or dependent care are tax-deductible, as long as you meet the IRS’ requirements.
If you’re a start-up:
- Start-up Expenses
If you’re launching a new venture, you might be able to deduct up to $5,000 in start-up expenses leading up to the launch. This can include costs associated with marketing, employee training, or business materials.
- Licenses & Permits
The cost of any required business licenses or permits can be deducted from your taxes. This can include building permits, licenses to practice in your state, etc.
- Legal & Professional Expenses
This category includes fees paid to certified public accountants (CPAs), financial planners, lawyers, and any other hired professionals.
- Manufacturing & Raw Materials
Anything related to the cost of manufacturing products for sale can be expensed.
- Brand Identity (i.e., logo, etc.)
Similar to advertising cost deductions, anything you spend to develop your wordmarks, logo, or brand identity can be submitted as a deductible expense.
If you’re scaling up:
Expansion is expensive. These are some things that you can deduct, while you’re growing your business.
- Moving Expenses
For any work-related moving expenses, you can deduct 100% of the related costs. The only rule is that the new location must be at least 50 miles from your previous one.
Any costs incurred for recruitment, human resources, and software solutions to assist with the hiring process can be claimed as a business expense.
- Brand Positioning & Trademarks
When you expand, you need to modify your brand positioning and licenses. This expense is tax-deductible.
Be mindful that expanding into new geographical areas and scaling your business may require a new set of licenses and additional insurance costs and other legal expenses.
Home office & work-from-home expenses:
This applies to anyone working remotely or from a home office. With all the shifts to remote work over the last couple of years, many are seriously reconsidering going back to the office. Whether you only work from home, or you’re implementing a hybrid model, how much you spend working from your home will affect your deductions.
- Mortgage Interest
If you’re working out of your home, you’ll be able to deduct the interest incurred from your mortgage loan.
- Medical Expenses
If you’re self-employed, and you pay for your own medical expenses and insurance premiums, you can deduct these expenses as well. This includes doctor’s fees, prescription drugs, and assistive devices like crutches.
Any improvements or repairs done to increase the efficiency of your home office space could be tax-deductible.
- Real Estate Taxes
Any taxes paid towards your home office should be itemized, and included with your other deductions.
- Retirement contributions
You can reduce your taxable income, if you’re contributing to a tax-advantaged account, such as an IRA or 401k.
You can also include business travel, food, and vehicle expenses as a self-employed worker.
Once you’ve decided how you’re going to group your expenses, don’t put off tracking and recording it until the last minute. Doing so will only create substantially more work for you when it comes time to file your return.
After all, if you’re looking for investors, outside financing, or building financial projections, you should have an accurate estimate of your expenses and deductions. Whatever method you choose, you should be tracking everything.
You can do your expense tracking manually with a spreadsheet and paper receipts, but in truth, there are lots of business accounting software options that offer much easier, and more accurate expense tracking.
Accounting software allows you to extract and record expenses, generate expense reports, create backups, and establish a clean paper trail, in case you’re ever audited. Just remember to save your receipts too, in case you're ever audited.
A lot of e-commerce platforms and payment services have built-in APIs that allow you to integrate with accounting software. For example, Shopify offers easy integration with QuickBooks, while FreshBooks works well with Shopify, as well as Square, Stripe, G Suite, and Squarespace.
Deductions can make an enormous difference to your business’ return, and the liquid assets that come with larger rebates. Getting yourself some reliable software to organize and track all of your eligible expenses will help make this process painless and efficient.
Most of all, check with a tax professional or the IRS before you submit your claim. The suggestions we’ve given are those of the author and do not necessarily reflect the official policy or position of the Internal Revenue Service.
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We understand how hard it is to be a small business owner. You’re trying to grow your business, and you want to get the most value for the money you’re already spending.
Truly Financial makes your business banking effortless. We skip all the fat-cat banking ideas and complex financial terms, so that we can ensure you get the best options for your company.
Focus on making the right decisions for your business, like taking the time to accurately track your expenses and let us do the rest for you.