How to Break Down Business Expenses for Taxes
When you write off business expenses, the Internal Revenue Service expects you to put them into categories. The IRS looks at each category to see if it passes the "reasonableness" test. If you have a category of expenses that is out of line with what most businesses claim, the IRS may take a second look. You won't necessarily get audited, but you could have to provide documentation to support your claim.
Keep track of the wages you pay and keep the totals in a category separate from all other expenses. You can include payments in cash, services or property. You may also include bonuses and commissions, as well as vacation allowances and fringe benefits. Do not include your share of Medicare and Social Security taxes that you pay for employees.
Your business must contract with suppliers, contractors and service providers. You can write off all money you pay to have nonemployee tasks done. If you are responsible for providing supplies for any contractor, you may write those off as well. Keep this figure separate from employee wages, because you don't pay Medicare and Social Security taxes on contractors.
You can write off all of your rent for your business premises. Or you can write off mortgage interest you pay if you own your premises. Total this figure and keep it separate from other expense categories.
You can't write off federal taxes that you pay. You can, however, write off state and local taxes. This includes county property tax, as well as state income tax and foreign taxes. You should include Medicare and Social Security taxes you pay for employees in this category.
The broad category "cost of goods sold" includes inventory, labor directly related to selling goods, materials and supplies. Track all expenses related to actually selling your goods and put them in this category.
Interest you pay on business loans or leases is a separate category of expenses. Examine your bank statement to see what interest was charged to you throughout the year. Also look at your leases to see what amount of interest you are paying on equipment you're leasing. Loans from banks and other financial institutions also carry interest you can deduct. Total all of your interest as one sum.
Insurance premiums you pay on behalf of employees are deductible. You should also add up business insurance and insurance on company vehicles.
If you have a business debt you can't collect, you can write it off. Do not put any other expenses in this category, because it could make your bad debt figure look higher than it really is.
Track your business travel and meals you eat while traveling. You can also add expenses for entertaining clients to this category.
Your advertising expenses can greatly reduce your taxes. Total all expenses for buying media ads, paying for storyboards, recording time and mock-ups. Include payments for marketing software and supplies for your marketing tasks.
Keep a total of all your electricity, natural gas and propane expenses. You can use the totals from your utility bills, even if those figures include fees and taxes.
Any expense you incur for vehicles is tax deductible. You have two choices on this one. You can total the miles you put on your vehicles and take the IRS standard per-mile deduction, or you can track actual expenses, such as gasoline, maintenance and repairs.
Keep track of money you pay for licenses and fees. You may also include professional dues for memberships to business-related organizations.
Your business may donate goods to a charity. You may also provide materials and labor for community-improvement projects. Track these donations separately from other expenses.