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Understanding tax deductible business expenses


Generally, all businesses can deduct from their income expenses that are incurred not only to make the business operational, but also to maintain that business once it is up and running. The best way to view this question is from the view of tax law, which is the final arbiter of what is tax deductible.

This law states that any expense a business incurs to generate income is a legitimately deductible expense. Therefore, this not only relates to the purchase of goods and other supplies, but also to the many fees and other expenses that are involved in starting a business. Further, all expenses incurred to maintain that business, such as rents and marketing costs, are also deductible from any income the business earns.

In terms of timing, the only restriction is that expenses incurred in a business's fiscal year must be claimed against income earned in that year. There are wrinkles to this process relating to accounting methods (income or expenses secured in a fiscal year, but not actually paid until the following year, must be included, for example).

As to what is deductible, the tax form lists allowable expenses, including such direct expenses as:

  • Advertising
  • Bad debts
  • Business taxes, fees, licenses, dues and memberships
  • Delivery, freight and express
  • Fuel costs (except for motor vehicles)
  • Insurance (fire, theft and liability)
  • Interest
  • Maintenance and repairs
  • Management and administration fees
  • Meals and entertainment (50%)
  • Motor vehicle expenses
  • Office expenses
  • Supplies
  • Legal, accounting and other professional fees
  • Property taxes
  • Rent; salaries, wages and benefits
  • Travel
  • Telephone and utilities
  • "Other" expenses

In addition, a business can indirectly deduct capital expenses for such things as equipment and motor vehicles that are used exclusively for the business. Vehicles used part-time for the business are in another category.

The capital cost allowance formula uses a sliding scale of depreciation costs that includes several classes and allowable yearly deduction rates. A computer, for example, is a class 10 piece of equipment that can be deducted at a rate of 30% a year (but just 15% in the first year).

Speaking of motor vehicles, operating expenses for these represent another category, which includes fuel and oil, interest, insurance, license and registration, maintenance and repairs, leasing costs and other expenses. These may be deducted proportionate to use by the business.

For home businesses, you can deduct some home expenses for heat, electricity, insurance, maintenance, mortgage interest (or rent), property taxes and "other expenses." Again, this must be proportionate to the portion of the home used for the business.