Updated Feb 2nd, 2020
Wether you have a LLC/Corporation or receive business income personally via form 1099-Misc… The answer I give to all my clients is: “Any expense that is necessary, ordinary, reasonable, documented, and legal may be deductible…”
- Ordinary: means it is commonly accepted in the industry and seen often with other businesses in the same trade
- Necessary: means the expense was required in order to generate the business income or it was incurred as a consequence of the income producing activities. But it does not need to be indispensable in order to be deductible
- Reasonable: this is very subjective, but in essence it means it is not lavish or extravagant
- Documented: means that the taxpayer has the burden of proof to prove the expense existed, that the amount reported is accurate, and it has a true business purpose (necessary)
- Legal: the expenditure cannot break any laws, be considered a bribe, or made in connection to an illegal activity / or activity in which the business does not gave the legal capacity to perform
Here is a list of the top 10 mot common deductions that can be confusing:
- Home Office Expense: Frequently failing to document the square footage of the home, creating a business-only environment, and document its business purpose is the most common issue. You can deduct actual expenses ], limited to square footage. Or use the safe harbor method of $5 per dedicated square foot (limited to $1,500 for the year)
- Vehicle Expense: mixing personal and business use of vehicles and not properly tracking milage is a large are of non-compliance. you can deduct actual expenses or deduct $.55 per mile
- Insurance: business insurances are all deductible
- Health Insurance: premiums paid for health insurance may be deducted on personal return for business owners (Note: S-Corps have special reporting requirements)
- Charitable Contributions: For pass-through entities, such as S-Corporations and Partnership/LLC’s, charity is “deductible” only on the persona return, but most taxpayers cannot get any benefit for it because of standard deductions. Political contributions or “Gifts” to 3rd parties are NEVER deductible
- Meals: spent while working or while conducting business
- Travel Expenses: frequently combining personal with business travel is a large problem. But all unreimbursed business travel is deductible
- Employees and Subcontractors: not properly correctly categorizing employees or contractors and reporting them as such; which may lead to large payroll tax penalties or disallowance of contractor expenses
- Retirement and Deferred Compensation Plans: 401k or pension plans will reduce your taxable income.
- Write-off: open invoices/receivables that are deemed uncollectible, open bills/payables that will not be paid, and adjusting Inventory quantity/valuation. For ACCRUAL-BASIS taxpayers
- Pre-startup costs: made before the business started and.or in connection to setting up the business. Also some business owners tend to “cover” business expenses with personal funds or personal credit cards (outside of the business bank accounts) and forget to register it in the business books
Here is a 55-minute video I recorded to explain all these in detail:
Additionally, here is Here is a list of typical Expense accounts from my accounting software across multiple industries, so you may want to summarize your chart of accounts to 20-25 accounts max…
| Expense Type/Name | Description |
| Advertising and Promotion | Advertising, marketing, graphic design, and other promotional expenses |
| Auto and Truck Expenses | Fuel, oil, repairs, and other maintenance for business autos and trucks |
| Bank Service Charges | Bank account service fees, bad check charges and other bank fees |
| Blueprints and Reproduction | Blueprints, photostats, and other printing expense |
| Bond Expense | Construction bonds expenses directly related to jobs |
| Building and Property Security | Building and property security monitoring expenses |
| Business Licenses and Permits | Business licenses, permits, and other business-related fees |
| Commissions Paid | Commissions paid to outside sales reps and agents |
| Computer and Internet Expenses | Computer supplies, off-the-shelf software, online fees, and other computer or internet related expenses |
| Conferences and Meetings | Costs for attending conferences and meetings |
| Chemicals Purchased | Costs of chemicals used in farming operations |
| Construction Materials Costs | Construction materials costs |
| Continuing Education | Seminars, educational expenses and employee development, not including travel |
| Accounting Fees | Outside (non-employee) accounting, audit, bookkeeping, tax prep, payroll service, and related consulting |
| Legal Fees | Outside (non-employee) legal services |
| Cost of Goods Sold | Cost of inventory or inventory / stock purchases |
| Contracted Services | Direct labor costs for contract (non-employees) performing services for clients |
| Depreciation Expense | Depreciation on equipment, buildings and improvements |
| Dues and Subscriptions | Subscriptions and membership dues for civic, service, professional, trade organizations |
| Equipment Rental | Rent paid for rented equipment used for business |
| Equipment Rental for Jobs | Rent paid for rented equipment used on jobs |
| Special Events | Brand vangelism, and special events |
| Facilities and Equipment | Expenses related to office, storage, and other space |
| Fertilizers and Lime | Fertilizers and lime purchased for farm operations. |
| Food Purchases | Food purchases including meats, vegetables, and all ingredients for Restaurants |
| Freight and Shipping Costs | Freight-in and shipping costs for delivery to customers |
| Freight and Trucking | Amounts paid for freight or trucking of farm products. |
| Freight Costs | Costs of freight and delivery for merchandise purchased |
| Fuel for Hired Vehicles | Fuel costs for hired vehicles |
| Gasoline, Fuel and Oil | Gasoline, fuel or oil used for farm machinery |
| General Liability Insurance | General liability insurance premiums |
| Life and Disability Insurance | Employee life and disability insurance premiums |
| Professional Liability | Professional liability (errors and omissions) insurance |
| Workers Compensation | Worker’s compensation insurance premiums |
| Equipment Insurance | Insuring your equipment or facilities |
| Interest Expense | Interest payments on business loans, credit card balances, or other business debt |
| Janitorial Expense | Janitorial expenses and cleaning supplies |
| Job Materials Purchased | Construction materials used on jobs |
| Laboratory Fees | Charges from outside laboratories |
| Landscaping and Groundskeeping | Landscape maintenance, gardening, and pool maintenance costs of your building |
| Linens and Lodging Supplies | Costs of linens and other supplies for guest rooms |
| Marketing Expense | Advertising, marketing, graphic design, and other promotional expenses for our company |
| Materials Costs | Cost of materials used on jobs |
| Meals | Business meals, including travel-related meals (50% limited deductibility) NOTE: Entertainment is no longer deductible |
| Media Purchased for Clients | Print, TV, radio, and other media purchased for clients |
| Medical Records and Supplies | Filing supplies for medical records for medical practices |
| Merchant Account Fees | Credit card merchant account discount fees, transaction fees, and related costs |
| Ministry Expenses | Ministry expenses for non-profit / churches |
| Office Supplies | Office supplies expense |
| Other Construction Costs | Other costs directly related to jobs such as waste disposal, onsite storage rental, etc. |
| Other Job Related Costs | Other costs directly related to jobs such as waste disposal, onsite storage rental, etc. |
| Outside Services | Payments to outside contractors (non-employees) for projects, consulting, or short-term assignments |
| Parts Purchases | Purchases of parts for use on customer repairs or resale |
| Payroll Expenses | Payroll expenses |
| Postage and Delivery | Postage, courier, and pickup and delivery services |
| Printing and Reproduction | Printing, copies, and other reproduction expenses |
| Product Samples Expense | Cost of products used as floor samples or given to customers for trial or demonstration |
| Professional Fees | Payments to attorneys and other professionals for services rendered |
| Purchases – Hardware for Resale | Purchases of hardware items for resale that are not tracked or counted in inventory |
| Purchases – Parts and Materials | Purchases of parts and other supplies used on service and maintenance jobs |
| Purchases – Resale Items | Purchases of items for resale that are not tracked or counted in inventory |
| Purchases – Software for Resale | Purchases of software items for resale that are not tracked or counted in inventory |
| Reference Materials | Coding books, anatomical charts and models, etc. |
| Rent Expense | Rent paid for company offices or other structures used in the business |
| Repairs and Maintenance | Incidental repairs and maintenance of business assets that do not add to the value or appreciably prolong its life |
| Research Services | Research costs including legal library and subscriptions for research services |
| Restaurant Supplies | Supplies purchased for restaurant operations. Includes dishes, cookware, and other items not classified as inventory or fixed assets |
| Salon Supplies, Linens, Laundry | Costs of supplies used in the course of business (includes linens and laundry services) |
| Seeds and Plants Purchased | Seeds and plants purchased for producing farm income. |
| Shop Expense | Miscellaneous shop supplies and related shop expenses (rags, hand cleaning supplies, etc.) |
| Small Medical Equipment | Purchases of small instruments and equipment not classified as fixed assets for medical practices |
| Small Tools and Equipment | Purchases of small tools or equipment not classified as fixed assets |
| Storage and Warehousing | Amounts paid to store farm commodities. |
| Subcontractors Expense | Subcontracted services performed by other contractors |
| Taxes – Property | Taxes paid on property owned by the business, franchise taxes, excise taxes, etc. |
| Telephone Expense | Telephone and long distance charges, faxing, and other fees Not equipment purchases |
| Tools and Small Equipment | Purchases of tools or small equipment used on jobs |
| Travel and Meetings | Expenses related to travel, meetings, conferences |
| Conference, Convention, Meeting | Conducting, or sending staff to, program-related meetings, conferences, conventions |
| Travel Expense | Business-related travel expenses including airline tickets, taxi fares, hotel and other travel expenses |
| Travel Expenses for Drivers | Business-related travel expenses including hotel and meals for drivers |
| Truck Maintenance Costs | Maintenance, repairs, tires, etc. on trucks, tractors, and trailers for hire |
| Uniforms | Uniforms for employees and contractors |
| Utilities | Water, electricity, garbage, and other basic utilities expenses of your office or business facilities |
| Vaccines and Medicines | Vaccines, medicines, and other drugs for medical practices |
| Worker’s Compensation Insurance | Worker’s compensation insurance premiums |
Here you can download the entire spreadsheet by industry
Also, an IRS Article for reference:
Also, some IRS Stats:
And for PERSONAL DEDUCTIONS here
