Starting a business is not an easy task and can involve significant costs. Depending on the scope of your business, you may be able to deduct certain startup costs from your taxes as business expenses. Business expenses are costs your business incurs to generate additional revenue.
Any expense that helps your business make more money can be considered a business expense. This may include expenses like advertising, wages, rent, software fees, utility costs, and more. To help your startup save money, you need to understand how to get the maximum tax deduction. Read on to understand what business expenses are, which expenses are not deductible, and how to use tax deductions to your advantage.
Business expenses are all the ordinary and necessary expenses that a business incurs to generate revenue. These include, but are not limited to, business start-up costs, including legal and accounting fees, as well as advertising costs. It also includes the cost of items such as fuel for company vehicles, office supplies and food for employees, as well as business property taxes. Capital expenditure (or expense) is the cost incurred to acquire new assets, including additions or improvements to existing assets. Some examples include real estate, equipment, software or licenses. Capital costs are very different from business costs. They should not be grouped together when filing income tax returns.
According to the IRS, when starting a new small business, certain tax deductions will be available to cover initial startup costs. In general, business expenses are investments used to make more money for your business. You can deduct the following business start-up costs from your taxes:
What doesn’t count as a business expense? Knowing what you can deduct as a business expense is just as important as knowing what you cannot deduct. Once you can tell the difference between what counts and what doesn’t count as business expenses, you can file your taxes accurately.
Business expenses you incur directly related to your business, such as supplies used in your business or hobby, are generally deductible. Some business operating expenses are not included in business expenses. They are usually not deductible.
Make sure you don’t duplicate your business tax deductions. For example, if you include an expense in your cost of goods sold as a deduction, you cannot deduct it as a business expense. On the other hand, you can divide your deductions between expenses used for both your personal and business use. You can deduct business expenses according to the percentage they are used for your business.