A Business Owner's Guide to What You Can (and Can't) Write Off - Brink's Money
A Business Owner's Guide to What You Can (and Can't) Write Off
10 Sep 2021
What do you think of when you think of “business expenses”? You may think about per diems, travel reimbursement, and wining-and-dining clients.
You may also think about paper receipts, contested expenses, and, in general, an organizational headache. You can streamline business expense management with debit cards, which deliver the analytics you need to manage spending limits.
But you also need to know what will qualify as a legitimate expense come tax season. The IRS has a 50,000-word document with near-infinite details. Here’s an overview to get you started.
What exactly is a “business expense”?
A business expense, according to the IRS, is “both ordinary and necessary” to the business. An ordinary expense is “common and accepted in your trade or business.” A necessary expense is “helpful and appropriate for your trade or business.”
When you claim a business expense for your company, you reduce your taxable income. A lower business income shrinks your tax bill. (A “tax deduction” is the official IRS term for a “tax write-off.”)
Some rules and definitions have been standard for decades. For example, you can claim an expense only if you spend the money, and you need to have the records to prove the expenditure. You can’t write off federal taxes or tax penalties, political contributions, or illegal activities.
Other rules have changed, especially following the 2017 Tax Cuts and Jobs Act. If you haven’t updated your expense policies since then, you’ll want to take another look.
Business expense planning matters now more than ever—especially to your employees
The 2017 Tax Cuts and Jobs Act changed business expense reporting—for companies and employees—for the tax years between 2018 and 2025. The IRS details those changes on its website.
The most important change may be for your employees. Historically, employees could deduct unreimbursed expenses from their personal taxes. If an employer didn’t have a comprehensive plan in place, there was still a way for employees to recoup some of the money they spent.
That’s no longer true. With those personal deductions no longer available, any hole in your expense planning is a hole in employees’ pockets—no help to employee happiness and retention.
An “accountable plan” protects employers and their employees. Guided by IRS recommendations, an accountable plan provides guardrails for certain types of business expenses.
These ensure fair reimbursement and also avoid over-reimbursement, which employees must report as income. Accountable plans have three core components:
Expenses must have a business connection. You must have paid or incurred deductible expenses while performing services as an employee of your employer.
You must adequately account to your employer for these expenses within a reasonable period of time.
You must return any excess reimbursement or allowance within a reasonable period of time.
If an employee takes a business trip by car, for example, the accountable plan would note:
Expenses are for business driving only.
Employees must provide complete and detailed expense reports (e.g., gas, repairs, etc.) within a reasonable timeframe.
Employees must return any excess payments within a reasonable time.
Even with a good accountable plan, which expenses can an employee on a business trip write off?
Common business expenses you can (and can’t) write off
The list of potential business expenses is long. It’s not without wiggle room, either. The IRS also gives businesses choices on how they want to calculate expenses (i.e. standard rates versus manual calculations).
Below are details for some of the most common expenses.
Capital expenses vs. operating expenses
One key difference in expense management is capital expenses versus operating expenses. Capital expenses, in general, are business purchases expected to last more than a year—large equipment, buildings, cars, etc.
You can claim these expenses, but you deduct only a percentage of them each year, a process known as depreciation. Startup costs beyond $5,000 are also treated as capital expenses, so even though you may spend far more in your first year, you’ll have to spread the tax deduction over several years.
Operating expenses, on the other hand, are the day-to-day costs of running the business. A number of supplies (e.g., paper, printer ink) qualify as operating expenses because they’re used up in a short period of time.
So, too, are costs for employee uniforms—but not business casual attire. (“If it can be worn outside of work, it’s probably not a uniform.”) Such expenses are written off in a single year, not over time through depreciation.
Commuting to and from a place of work isn’t deductible. Commuting from a home to a customer is; so, too, is commuting between two business locations.
For trips that mix business and personal travel, employees may deduct the percentage of the expenses that relate to the business aspect—as long as they have the documentation to split the costs accurately.
In either case, you can track actual expenses or use the standard mileage rate, which was $0.56 per mile in 2021.
The list of travel expenses from the IRS includes not just major expenses (e.g., plane tickets and hotels) but also a number of smaller expenses:
Fares for taxis or other types of transportation between the airport or train station and your hotel; the hotel and the work location of your customers or clients; your business meeting place; your temporary work location.
Shipping of baggage and sample or display material between your regular and temporary work locations.
Using your car while at your business destination, as well as business-related tolls and parking fees.
Rental cars (the business-use portion only).
Business calls, including faxes or other communication devices.
Tips you pay for services related to any of those expenses.
Other “ordinary and necessary expenses” (e.g., computer rental fees).
Any trip, of course, also includes meals—for employees and with clients.
For employees on business trips
When employees are traveling, the IRS defines a “standard meal allowance,” which varies based on the location. For most small and mid-size cities, it’s around $55 per day.
The standard rate includes a breakdown for certain meals (e.g., $16 for a continental breakfast) as well as a lower rate for the first and last day of travel—when at least one meal will likely occur at home.
Taking the standard allowance means you don’t have to keep track of individual receipts. It can also help you determine how much to advance to employees or preload on an expense card—rather than asking employees to pay the bill and wait for reimbursement.
For client meals, 50% of the meal is usually deductible. An employee must be present for the meal—you can’t book a reservation for a customer, then expense the costs.
As with travel expenses, you’re not allowed to deduct “extravagant” costs, so you may raise eyebrows if auditors see a meal that includes a $2,000 bottle of wine.
A client evening that includes food and entertainment needs to separate the two expenses. Entertainment costs, at least until 2025, are less likely to be reimbursed.
The 2017 changes to tax law largely eliminated deductions for entertainment expenses.
You can’t deduct country club membership dues (or those for “any club organized for business, pleasure, recreation, or other social purposes”), even if your team has closed plenty of deals on the golf course. Similarly, you can’t deduct the annual cost of a box at a local sporting venue, concert tickets, or a hunting trip.
Further, you can’t claim any expenses related to the use of an entertainment facility (e.g., for a private event). An exception is a holiday party or other event for your internal team.
You are allowed to deduct fees and dues for civic and public-service organizations.
As far as gifts go, you can deduct up to $25 per gift. So, for example, if you send 20 clients $100 gift baskets, you can deduct only $500 of the total $2,000 spent.
Where to go from here
If the array of business expense regulations is dizzying, go back to the start—”ordinary and necessary” expenses.
As with most tax rules, there are always exceptions. Mapping out your expenses will help you develop a plan that keeps you on the good side of the IRS and takes care of your employees.
Automating business expense management gets you halfway there.
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