Running a business can be an expensive venture, but the Internal Revenue Service (IRS) gives companies a break by allowing businesses to deduct expenses on their annual tax returns. The IRS lays out guidelines for what it considers legitimate office expenses, in its annual Publication 535. However, basic categories remain standard from year to year, and are commonplace for most companies. Keep accurate records of your expenditures and you can receive a nice reduction in the amount of tax you owe each year.
Categories of Expenses
Confusion often occurs when understanding the difference between office, business and supply expenses because the terminology is easily interchanged. Small items used in the typical office setting such as staplers, tape, pens, file folders, ink and copy paper are considered office supplies and should be listed on line 18 of IRS form Schedule C, a business's Profit or Loss statement. All other office expenses are itemized on other lines under Part II and are broken out into separate categories. In general, they are all consider expenses incurred by the office or as part of the daily operations of the business.
Salaries and Retirement Plans
The amount paid to employees for the work they perform is usually the biggest office expense incurred by businesses. The pay must be reasonable within the industry and can include salary, commissions, bonuses or any benefits or allowances the company provides. Additionally, money you contribute to some types of retirement plans may also be deductible.
If you rent office space or an entire building, the amount of rent you pay is a business expense. This figure is deductible, as long as you do not own any part of the building or receive any equity in the property. Also, if your business uses space in your home, a portion of the rent or mortgage may be deductible, based on the percentage of space which is used for the business.
Utilities and services are vital to keeping the lights on in an office. Electricity, gas, oil, phone service, water and sewer are all considered utilities and office expenses. Internet service falls into its own category, but it can be deducted as long as it is solely for business purposes. In home-based offices, only the business portion is allowable. Similarly, in a home office, the first telephone line in the home is not allowable as a business expense, but a second dedicated line or any long distance business calls are considered office expenses.
Funds used to cover premiums toward a broad variety of insurance plans are generally deductible, as long as they are related to your trade or business. Insurance that covers malpractice, unemployment, workman's compensation, employee health, liability, vehicle, or loss from fire, theft, storm damage or bad debt are all valid business expenses. However, some insurance costs, such as those associated with the company's start up, must be capitalized, rather than taken as a deductible.
Auto Expenses or Mileage
The cost of operating a vehicle that your business owns is another category of expense. This includes insurance, repairs and gas. The actual cost of the vehicle itself is not an office expense, but is a capital expense that depreciates over time. However, reimbursements to employees for business use of their own vehicles are office expenses and should be paid at the standard federal mileage rate, a figure that changes annually.
Any interest a company pays on funds borrowed for the purpose of business activity is a reasonable office expense. If a loan is a combined personal and business expense, you can only count the business portion as an expense for tax purposes.
In general, any repairs made to your building, vehicles or office equipment, such as tools or computers, fall into this expense category. If the repairs are made to keep the equipment in working order for the continued, efficient operation of your company, the expense is deductible. However, if significant improvements are made, which increase the overall value of a building or assets, then the expense must be capitalized.
Costs for legal counsel, accounting advice, business association fees, memberships to professional organizations and subscriptions to trade journals are all examples of expenses under the professional services category. However, memberships to social or athletic clubs for personal use do not fall into this slot.
Promoting your business is key, so the costs of advertising are often a big expense for companies and deductible as well. However, you cannot deduct any amount used to lobby for specific legislation that would benefit your organization.
Meals and Entertainment
Many may refer to this item as their "expense account." Eating a meal on the road or entertaining a client is all part of normal business operations, so it counts as an expense. However, even if you reimburse your employees for 100 percent of their expenses, you can generally only deduct 50 percent of the total expense on your taxes.
In general, other than supplies, office expenses tend not to be physical items, but rather intangible things that are part of the cost of doing business. Two exceptions are for the cost of goods sold and capital expenses, both of which have their own categories and rules for tax purposes. Larger price-tag items such as vehicles, machinery, computers and furniture -- anything over $200 that will be used longer than a year -- are considered capital expenses. Any money spent on producing goods for sale or those goods purchased for resale are categorized as the cost of goods sold.
There are many rules that govern whether or not certain expenses are deductible on a tax return, so always consult an accountant or business tax professional for advice. They are aware of the standard categories in which businesses spend money as part of their operating budget, and can guide clients how best to maximize their tax benefit.
Elisabeth Natter has been writing news and information articles for over 15 years. She has done public relations work for several nonprofit organizations and currently writes content for business clients of her suburban Philadelphia communications company. She holds a Bachelor of Arts degree in journalism from Temple University.