What is a Business Expense Deduction?
A business expense deduction, also known as a business deduction or a tax write-off, refers to costs that a business incurs as part of its operations. These expenses can be subtracted from gross revenue to determine taxable income, which will eventually lower the company’s business’s tax liability.
Understanding Business Expenses
According to the IRS, a business deduction is an expense that is “ordinary” and “necessary”.
- Ordinary Expense is an expense that is common within that industry.
For example, purchasing office supplies, software subscriptions, etc.
- Necessary Expense is an expense that is required or needed and helpful for the business.
For example, advertising, business travel, etc.
Only expenses that are directly related to what the company does can be deducted. These deductions will help reduce the taxable income of the company.
Types of Deductible Expenses
Business expenses fall into three major categories:
Direct Expenses
These are costs that are directly related to the production of goods or services. For example: Raw materials, labor, and inventory.
Indirect Expenses
These are costs necessary for operating the business but not directly tied to production. For example: Rent, office supplies, utilities, etc.
Interest on Debt
This is the interest paid on business loans, credit lines, or mortgages related to business property.
Examples of Deductible Business Expenses
Here are a few examples of deductible business expenses:
- Home Office Expenses
- Rent or Lease Payments for office/retail
- Employee Wages & Benefits
- Business Insurance Premiums
- Taxes & Licenses (e.g., payroll taxes, business permits)
- Legal & Professional Fees (e.g., accountant, attorney)
- Retirement & Pension Contributions
- Business-related Loan & Credit Card Interest
- Advertising & Marketing Costs
- Travel & Meal Expenses