Business Expenses to Include in Budgeting and Taxes

Business Expenses to Include in Budgeting and Taxes
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As a business owner, you'll want to make sure you keep track of your expenses. It's essential for budgeting and for tax planning. Some of the expenses you'll want to ensure you keep records for include location costs, equipment, salaries, and insurance costs.

Key Takeaways

  • Businesses can deduct many costs that individual taxpayers can't, like rent, vehicle expenses, and travel expenses.
  • You'll need to record all of your expenses so that you can keep track of cash flow and so that you can prove your deductions to the IRS.
  • Most expenses that are necessary for your business to function can be deducted from business taxes, including wages, advertising, and office supplies.

Why Budgeting and Tax Planning are Important

The two most important financial tasks of a business owner are budgeting and tax planning. Budgeting, especially watching your cash flow, keeps your business from overspending and getting into trouble with making payments.

Tax planning keeps you from having unexpected payments at tax time and helps keep your taxes to a minimum. Although different types of businesses have different expenses, there are many common types of expenses.

Note

The more business expenses you can take as tax deductions, the lower your business income, and the lower your business taxes will be. But you must be able to prove that you should be able to deduct these expenses. That way, if you're ever audited, you'll be able to show the IRS your records.

Location Costs

Every business needs a place to operate, and there is almost always a cost for the location. It might be a mortgage on a building or rent on a leased office or retail space, or a part of the cost of space in your home business. 

Let's look at some monthly location costs in detail: 

Mortgage: If you own a building and have a mortgage on that building, the interest on the mortgage is usually deductible. The property itself is an asset that is depreciated (that is, the purchase cost is spread out over time.) You can deduct the depreciation expense for the current year.

Building lease: If you are leasing a building or commercial space for your business, you can typically deduct the cost of the lease payments and other costs associated with the lease. You can only deduct the current year's payments on the lease.

Home business location: If you have a business in your home, you can deduct some of the costs of your home office, as long as the space is used both regularly and exclusively for business purposes.

Note

If you have a small office space in your home, you may be able to take the simplified home office deduction, which is capped at $1,500 per year, depending on the size of your home office.

Utilities, Phone, and Computer Expenses: If your business is based out of a building that you own outside of your home, your business must pay for utilities. That can include electricity, gas, water, telephones, and other city services like trash pickup. If you are renting a location, some of these costs might be included in your rent.

If you have a home-based business, your home landline is not deductible as a business expense, but you can deduct the cost of business-related long-distance calls. Also, the cost of a second line for business use is deductible.

You'll most likely be able to deduct the cost of a cell phone that you use for business, as well as internet and computer costs.

Equipment, Furniture, and Machinery

You can deduct the cost of buying things like office furniture, retail shelving, machinery, and basically anything you have inside your business that lasts longer than a year. The IRS calls them capital assets and says you must depreciate them (spread the costs over a number of years).

Note

Calculating depreciation and following the IRS regulations can be complicated. If you have an accountant or tax professional, it may be best to just keep records about the costs of buying your business assets and give the information to them.

Some equipment that you purchase for your business is considered listed property. The main categories of listed property are passenger cars, transportation vehicles, and property generally used for entertainment, recreation, or amusement. Listed property is a special IRS category that requires you to keep business and personal costs separate and deduct only the business part of the expenses.

Vehicles and Driving Expenses

If you buy a car or truck for your business, the cost is depreciated, like the other business assets described above. To be available for the depreciation deduction, the vehicle must be driven more than 50% of the time for business purposes.

You can also deduct the cost of driving your car for business, using either of two methods: a standard deduction or actual expenses.

Other Services and Maintenance Expenses

Other services that most businesses incur are maintenance costs on the facility, equipment, and general building maintenance. Businesses also have costs for lawn mowing, snow removal, and other outside costs. You may be able to deduct costs for repair and maintenance of your business property, or you may be able to depreciate some of these expenses. You'll probably want to run these deductions past a tax professional.

Business Insurances

Every business needs several types of insurance and you can deduct insurance costs as a business expense. You might need to deduct casualty and theft insurance, professional liability insurance, insurance for your vehicles, and many other types of business insurance.

Wages, Salaries, Payroll Taxes, and Benefits

You will need to pay employees according to the payroll system you have set up. The cost of employee wages and salaries and some employee benefits are all deductible to your business. You can also deduct employment taxes, including:

Note

Here's a list of employee benefits that you can deduct as a business expense. You should also be aware of which benefits are taxable to employees.

Supplies and Other Office Expenses

You can deduct the cost of materials and supplies you use during the year. If you keep incidental materials and supplies on hand, you can deduct these if you don't keep a record of them or take inventory and if this method doesn't distort your income for the year.

Professional fees

You can deduct the cost of fees you pay to professionals, including your attorney, CPA/tax professional, and other professional consultants. You may not hire or pay these professionals on a regular basis, but you should budget money for this category just in case.

Note

Legal and professional fees you pay in the process of buying business assets, including buying or starting a business, aren't deductible. They are added to the basic cost of the property and are included in depreciation or amortization of the property.

Advertising and Marketing Costs

You'll want to deduct costs for advertising including social media marketing and other marketing and promotional expenses, such as newspaper ads, billboards, and online advertising. You could include web maintenance costs here or put these costs under office expenses.

Business Club Association Fees

Fees for your membership in a professional association or business group should be included here, as well as professional publications. For example, you can deduct the cost of joining a chamber of commerce, professional or trade association. You can't deduct costs for membership in any club organized for a social purpose, like a country club, sporting club, or airline club, even if you do business there.

Travel Expenses

For these expenses, you will need to:

  • Include them in your monthly list of expenses for budget purposes and
  • Keep good records to show the business purpose for each for tax time.

Travel expenses:  Keep track of air travel, hotels, and meals while you travel.

Business Meal expenses: You will only be able to deduct 50% of these costs, but keep detailed records and include them in your budget and taxes anyway. Business entertainment expenses are not deductible.

Note

You should still keep records of business expenses you cannot deduct. They may still be part of your budgeting process.

Frequently Asked Questions (FAQs)

What should you include in a budget for a business?

You'll need to include your estimated revenue and your estimated expenses. Figure out how much it will cost to make your product, and how much of your product you can reasonably expect to sell, and at what price. As you continue to grow and build your business, you'll be able to get a more accurate picture of your business costs and income. You can look at our sample business budget template to get an idea of potential costs to take into consideration, including phone and utility expenses, licensing costs, office supplies, and advertising.

What are business expenses for taxes?

Business expenses that you can deduct on your taxes are expenses that "ordinary and necessary," according to the IRS. Ordinary expenses must be normal for your industry. Necessary expenses should be useful for your business, but do not have to be crucial to be considered necessary. You will probably not be able to deduct all ordinary and necessary expenses, but some expenses that you may be able to deduct include office supplies, insurance costs, and vehicle costs.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Publication 946 (2021), How To Depreciate Property."

  2. Internal Revenue Service. "Publication 535 (2021), Business Expenses."

  3. TurboTax. "Mobile Phones, Internet and Other Easy Tax Deductions."

  4. Internal Revenue Service. "Topic No. 704 Depreciation."

  5. Internal Revenue Service. "Publication 463 (2021), Travel, Gift, and Car Expenses."

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