Small Business Taxes & Management^TM--Copyright 2003, A/N Group, Inc.

What's deductible? You would think the IRS has a list, but the Internal Revenue Code provides little detail other than "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". That phrase covers about 95% of the items deductible. (The law specifically mentions salaries and other compensation for personal services, traveling expenses, rent, interest, taxes, pension and profit-sharing expenses and some other expenses.) The IRS Regulations, court cases and other rulings provide guidance additional guidance. We've been frequently asked to provide readers with a list of expenses they can deduct. The list below is general in nature but should provide a starting point.

Please keep in mind that only expenses related to your business are deductible. For example, if you buy a computer and use it 75% for business and 25% for personal use, you can depreciate only the 75% used for business. Thus, for any of the items listed below, only the business portion is deductible. Keep in mind that in order to secure a deduction you need not only an expense that qualifies as deductible, you also need have adequate documentation to support the expense. That generally means proving the expenditure was incurred (typically with an invoice) and proving it was paid (canceled check, receipt, etc.).

The rules can often be complicated. The best approach is to record all your expenses in detail and discuss them with your accountant or tax advisor.

Here's our list. It's far from all inclusive and some of the items are subject to special rules. We've included comments on certain items.

Accounting fees
Advertising
Amortization Some costs such as start-up expenses, organization costs can't be deducted but must be capitalized and amortized over a number of years.
Auto Actual expenses or standard mileage.
Bank charges
Charitable contributions Special rules apply to regular corporations; contributions by S corporations, partnerships, and sole proprietorships are deductible by the shareholders/partners/owners.
Cleaning
Cost of goods sold
Commissions
Consultants
Credit and collection charges
Delivery
Depreciation
Dues and subscriptions
Education
Employee benefit programs Health insurance, education expenses, etc.
Entertainment Generally only 50% is deductible.
Equipment rent
Freight in
Home office Special rules apply.
Insurance Business, etc., but not health.
Interest
Internet service Web connection and web hosting
Laundry Uniforms used in business.
Legal Some legal expenses, such as those associated with asset purchases, can't be deducted directly.
Licenses
Meals Special rules apply. Generally only 50% is deductible.
Office supplies
Office expense Outside costs such as temporary help, secretarial services, etc.
Pension and profit sharing
Postage
Printing
Repairs Expenses that keep equipment in repair, not prolong its life.
Salaries and wages
Security
Seminars
Small tools And those with life of less than a year. Others must be capitalized.
Software See the comment for small tools.
Supplies
Taxes
Telephone Including cell phone
Travel
Utilities Electric, gas, water, sewer, etc.

There are some expenses that aren't deductible, but must be capitalized and depreciated:

Equipment
Furniture
Computers
Buildings and similar improvements
Repairs that extend the life of the property

You may be able to write off some of these expenditures (e.g., equipment, but not buildings) if you make an election under Section 179 to do so.

Some expenses must be capitalized and amortized. They include:

Start-up expenditures (up to $5,000 can be expensed)
Organization costs (up to $5,000 can be expensed)
Business licenses with a life of more than a year
Acquisition costs of goodwill, customer lists, etc.

Some expenditures can't be deducted:

Penalties and fines Traffic tickets, fines for business activities.
Illegal bribes and kickbacks
Land And costs associated with land.

--Last Update 11/09/04