Savvy entrepreneurs do not just focus on sending out invoices—they also keep a record of their costs. The expenses you accrue to start, run, and grow your business are often considered tax-deductible, which could lower your tax obligations to the Internal Revenue Service (IRS). While some business expenses are clearly outlined on Schedule C, others fall under the miscellaneous category. Expenses such as these cannot be categorized but still should be included in your taxes to decrease your tax payments.
Deductible Business Expenses
Deductible business expenses are “ordinary and necessary” expenses needed to run your particular business. Typically, you’ll enter these expenses on the IRS’s Schedule C. Doing so tends to lower your taxable income. In general, the more expenses you have for your business, the less you will pay in taxes. The IRS defines “ordinary and necessary” expenses as costs that are commonly used in your business industry and that enable you to run your business. These deductible business expenses differ for various businesses. For instance, it is necessary for a hairstylist to purchase hair-styling equipment or hair products; these items are needed for a job to be complete. However, if the hairstylist buys a yoga mat and stretch strings, these items would not be considered ordinary or necessary expenses.
Examples of Deductible Business Expenses
Deductible expenses include:
Home office: If you are using a portion of your home exclusively or regularly to operate your business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation. Transportation: If you use your vehicle for your business, you can deduct certain vehicle-related expenses, including miles you drove for work or depreciation, lease payments, repairs, and other expenditures. However, if you are using your car for personal and business purposes, you will record your mileage. Insurance: You can deduct costs of insurance related to your trade, business, or profession. Taxes: Federal, state, local, and foreign taxes related to your trade or business are considered business expenses. Business interest: Certain types of interest you pay for money you borrowed for your business activities. Rental fees: You can deduct rent as an expense if it is used for your business. Retirement plans: Savings plans you set up for yourself and your employees such as a SEP IRA, SIMPLE IRA, or SIMPLE 401(k) provide you with very specific tax benefits while allowing you to save your money for retirement. Employee payroll: If you have employees, you can deduct certain pay-related disbursements such as sick and vacation pay, bonuses, education expenses, and fringe benefits.
When To Use Schedule A vs. Schedule C for Your Deductions
Before the federal tax laws changed in 2018, Schedule A included business expenses related to employment that a company did not reimburse. Now, Schedule A is only for individuals and is not often used by tax filers because most people take a standard deduction for unreimbursed employee expenses.
What Are Miscellaneous Expenses?
Miscellaneous expenses are defined as “other” expenses. These expenses are not specific but are still considered ordinary and necessary. Therefore, they are deductions that can be included on your Schedule C. You can list your miscellaneous expenses in broad categories such as bank fees, advertising, education, damages recovered, and credit card convenience fees.
Miscellaneous Business Expense Examples
There are many miscellaneous business expenses entrepreneurs can list on their Schedule C. The following are some of the expenses the IRS allows you to deduct:
Credit card convenience fees: What you pay to accept credit card transactions from credit card companies. Professional fees: These include fees you pay for accountants and attorneys for services related to running your business, not including fees paid to acquire business assets. Regulatory and licensing fees: You can deduct certain regulatory and licensing fees you pay to state or local government. Supplies and materials: The IRS allows you to deduct supplies and materials you used for your business during the tax year as long as you haven’t deducted them in previous years.
How To Deduct Misc Expenses
Deducting your business and miscellaneous expenses is not difficult. Here are the steps to seamlessly deduct your expenses:
