Business Expense Tax Deductions

It takes money to make money.

It takes money to make money. Knowing that, Congress has filled the tax law with opportunities for businesses both large and small to recoup a healthy portion of reasonable and necessary business expenses with tax deductions and credits. The better you know the rules and the better records you keep, the more Uncle Sam will subsidize the cost of running your business by lowering your tax bill.

And be sure to check out our other taxopedias.

What's Deductible? -- A to Z

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Advertising. Your business can deduct all of the cost of advertising as a business expense.

Automobile expenses. The standard mileage rate for business driving in 2010 is 50 cents per mile. Alternatively, you can keep track of the actual cost of operating the vehicle, including fuel, repairs, insurance and depreciation, and deduct that amount. For 2011, the standard mileage rate for business driving is 51 cents a mile.

Bad debts. If your business loaned money to someone and determined in 2010 that it would not be repaid, the loss is deductible against business income on your 2010 return.

Banking fees. Charges imposed by banks for business accounts are tax-deductible expenses.

Bonus depreciation. For new business property acquired during most of 2010, businesses can deduct 50% of the cost of property as bonus depreciation, and depreciate the remaining cost under the regular depreciation rules. For assets to be depreciated over five years, for example, the total first-year depreciation deduction would be 70% of the cost. An even better deal applies for new assets acquired and put into service after September 8, 2010. For such property, 100% bonus depreciation is allowed, meaning you can deduct the full cost on your 2010 tax return. The same 100% bonus depreciation rule applies for assets acquired in 2011.

Business gifts. Up to $25 a year can be deducted for the cost of business gifts to any number of customers or clients.

Business meetings. The cost of business meetings that you or your employees attend is a deductible expense.

Carryback losses. Generally, firms can use net operating losses in the current year to reclaim taxes paid for the previous two years. Thanks to economic recovery legislation, however, in many cases, 2008 and 2009 losses could be carried back for as many as five years and bring a refund of taxes paid for those years. This rule was not extended to cover 2010, so net operating losses incurred in 2010 – including those created as a result of 100% bonus depreciation – can be carried back only two years to generate refunds of taxes paid.

Child care facilities. Employers can claim a tax credit of up to $150,000 a year for 25% of the cost of building and operating child-care facilities for their employees.

Commissions and fees. Commissions paid to salespeople and other workers are deductible.

Contract labor. Amounts paid to independent contractors who provide services to your business are deductible.

Credit card fees. Fees imposed by credit card companies to process charge card sales can be deducted.

Credit for alcohol used as a fuel. This is a credit available to small producers of alcohol and ethanol fuels.

Depletion. Depletion is the using up of natural resources by mining, quarrying, drilling, or felling. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves.

Disabled access credit. If your company had gross receipts of $1 million or less in 2009 or employed no more than 30 workers then, it is eligible to claim a credit for expenses incurred in 2010 to improve access for the disabled, such as constructing entrance ramps or special parking spaces. The maximum credit allowed is $5,000. The first $250 of eligible expenses is ignored, and the next $10,000 of costs qualifies for a 50% tax credit.

Domestic production deduction. Businesses can write off 9% of their 2010 net income from U.S. production activities, including manufacturing, construction, mining, drilling and farming.

Depreciation. Depreciation deductions allow businesses to write off the cost of business assets over their “useful lives” as defined by the IRS – say, 3, 5, 7, 15, 20 or more years. For new assets put in service in most of 2010, a special 50% bonus deprecation rule was in effect. So, firms can deduct 50% of the cost of qualifying assets, plus a certain amount of the remaining cost depending on the asset’s useful life. For new assets acquired and put in service after September 8, however, there’s an even more generous rule: 100% bonus depreciation. That means the full cost of qualifying assets can be deducted on your 2010 return. (The same rule applies for all of 2011.) See also, Expensing.

Employee benefit programs. Businesses can deduct the cost of fringe benefits provided to employees, such as health insurance and retirement plans.

Expensing. Also called the Section 179 deduction, after the part of the tax code that permits it, this break allows businesses to fully deduct the cost of some assets placed in service that would otherwise be depreciated over many years. In general, for 2010 businesses are allowed to "expense" up to $500,000 of such costs. Firms that put into service more than $2 million of assets in 2010 gradually lose the right to use this break. Expensing might sound a lot like the 100% bonus depreciation mentioned above, and it is . . . although expensing was around before 100% bonus deprecation was created, and is likely to be around once that break expires. Also, expensing is generally for smaller firms – not the $2 million limit on acquisition of assets cited above. Also, unlike 100% bonus depreciation, expensing can be used to write off the cost of used business assets.

Goodwill. The cost of goodwill acquired as a result of a corporate merger can be amortized over a 15-year period.

Holiday parties. Your business can deduct the cost of holiday parties for employees.

Home office expenses. You can deduct the costs of a home office that you use exclusively and regularly for business. This includes depreciation, utilities and insurance for the office portion of your home. To qualify for the tax break you must either meet with clients there regularly or the home office must be your principal place of business (unless it is not attached to your house). You can pass the principal-place-of-business test even if you do most of your work elsewhere, as long as you manage the business from the home office and don’t have an office elsewhere.

Indian employment credit. Businesses get a tax credit for part of the wages they pay to members of Indian tribes who live on or near an Indian reservation.

Insurance. In addition to deducting the cost of health insurance provided to employees, businesses can deduct the cost of other types of insurance, including policies covering property and casualty protection, malpractice coverage and vehicle insurance.

Interest expenses. Interest paid on debt taken on by a business are tax deductible.

Investment credit. The investment credit consists of the rehabilitation tax credit, energy credits and the credits for qualifying advanced coal projects and qualifying gasification projects.

Legal and professional services. Amounts paid for legal and accounting services for your business are deductible.

Licenses. The cost of business licenses is deductible.

Low-income housing credit. Investors in projects that provide housing primarily to lower-income taxpayers can claim a credit for part of their investment.

Meals and entertainment. Fifty percent of the cost of meals and entertainment for clients is deductible, if you (or one of your employees) is present, the meal is directly related to or associated with the active conduct of your business and the meal is not lavish or extravagant.

Net operating losses. Net operating losses from your business generally are carried back for two years (triggering a refund of taxes paid) unless you specifically elect to carry them forward to future tax years. A special rule for 2008 and 2009, which allowed For 2009 (as for 2008), such losses can be carried back for as many as five years, was not renewed.

New markets tax credit. This is an incentive for investments in entities that lend money to firms in poorer areas. Investors get a 5% credit in the first three years on the money they put up and a 6% credit for next four years.

Office expenses. Office expenses such as bottled water services, janitorial services and the costs of window washing services are deductible.

Orphan drug credit. This credit is claimed by pharmaceutical companies on the costs of developing drugs to combat rare diseases affecting fewer than 200,000 people.

Passive activity credit. Credits from investments in activities you don't materially participate can only be used to offset the tax due on passive income. Credits that are disallowed by this rule in 2010 are carried over to future years.

Pension and profit sharing plans. Amounts paid for employee retirement plans are allowed as a deduction.

Pension plan startup costs. Small companies, generally those with fewer than 100 employees, are allowed a tax credit for the 50% of the cost of starting up new retirement plans. The maximum credit is $500 a year for the first three years of the plan’s existence.

Postage. You can deduct the cost of postage to mail business letters and packages.

Professional associations. The cost of membership in professional associations, board of trade and chambers of commerce is deductible.

Prizes and awards. The cost of prizes and awards given to employees can be deducted.

Reforestation costs. Owners of small timber firms can deduct up to $20,000 of timber reforestation costs. Any excess expenses can be amortized over 84 months.

Renewable energy production credit. A tax credit is allowed for energy produced from or wind, solar, geothermal and "closed-loop" bioenergy facilities, "open-loop" biomass, incremental hydropower, small irrigation systems, landfill gas and municipal solid waste facilities.

Rent. Your business can deduct amounts paid to lease office space. Special rules limit the deduction for rent paid in advance by businesses that use the accrual method of accounting.

Repairs and maintenance. Repairs you make to business equipment, office space, buildings and other property, as well as the costs of maintenance are deductible business expenses.

Research and experimentation credit. If your business increased its expenditures on research and development in 2009, you may be able to claim a tax credit for some of those expenses.

Self-employeds' health insurance. Self-employed individuals can deduct 100% of premiums paid for their health insurance, whether or not they itemize deductions on their tax return. This is a personal adjustment to income, not a business deduction.Note: For 2010 only, qualifying health insurance premiums can also be used to reduce the amount of Social Security tax due on self-employment income. You claim this tax break using line 3 of the Schedule SE; the income tax break is claimed using line 29 of the Form 1040

Special fuels credits. Producers of special fuels, such as alcohol fuels, low-sulfur diesel, fuel from nonconventional sources and from biodiesel, can claim tax credits.

Startup costs. You can deduct up to $5,000 of the cost of starting up a new business in the year the business is launched. Startup costs also can be amortized over a 60-month period.

Supplies. The cost of office supplies, such as paper, pens, notebooks, file folders, paperclips, scissors, rubber bands, appointment books, desk calendars and blank CD-ROMs can be deducted.

Tax paid on employee tips. Restaurants can claim a tax credit equal to the Social Security and Medicare taxes paid on tips that exceed the portion of tips treated as part of the servers' minimum wage.

Taxes and licenses. You can deduct the cost of Social Security tax and Medicare tax on employees' wages, as well as personal property taxes. Self-employed workers can deduct 50% of the Social Security and Medicare taxes they pay on their earnings.

Telephone. The cost of a telephone and long-distance calls for your business can be deducted, unless you operate out of your home and have only one phone line. In that case, you can deduct only the costs of separately billed long-distance calls.

Travel. The cost of travel overnight away from home can be deducted, including the cost of lodging, laundry and dry cleaning, tips to porters, and fees for fax services and Internet connections. You can also deduct 50% of the cost of your meals while on business travel away from home.

Utilities. The cost of utilities for your business is deductible, including electricity, gas, propane, heating oil, water and sewer fees.

Vehicle expenses. For 2010, deductions for vehicles driven for business can be claimed at 50 cents per mile. Add the cost of parking and tolls to the standard mileage amount. Alternatively, the actual cost of operating the vehicle, including fuel, repairs, insurance and depreciation can be claimed. For 2011, the standard mileage rate is 51 cents per mile.

Wages. Wages paid to employees are a deductible business expense.

Work opportunity and Welfare-to-Work credits. Employers are allowed to claim a tax credit for hiring members of disadvantaged groups, such as welfare recipients.

See our other taxopedias.