In Tax Topic 500, titled "Itemized Deductions," the Internal Revenue Service (IRS) divides deductible business expenses into four categories: home, car, entertainment and travel. Other business-related deductions are available, but fall within non-business specific categories.
The Four Main Categories of Business Deductions
Each of the four categories of business-specific deductions contains different rules and limitations. All business deductions must be substantiated through documentation. Reimbursed expenses are not deductible. A taxpayer does not have to be self-employed to claim these deductions. Additional information about these deductions is contained in IRS Publications 587 and 463.
Use of Home
Taxpayers can deduct the percent of their home that is "regularly and exclusively" used for business purposes. Examples of acceptable purposes include meeting with clients, storing business products or using an area as a principle place of business. The taxpayer can deduct the requisite percentage of their mortgage interest payments, rent, insurance and utilities.
Use of Car
Taxpayers can deduct either the specific costs of standard mileage rates for any use of their car for business purposes. The vehicle must be used solely for business and owned or leased by the taxpayer. Actual operation costs consist of the aggregate fuel, oil, repair, tire, insurance, registration, depreciation, lease and licensing fees incurred during the year. The standard mileage rate includes a set amount for each mile driven. In 2010, this amount was $0.50 per mile. Every taxpayer must use the standard rate for the first year they drive the car.
Business-related travel expenses are deductible. This category includes food, transportation and lodging costs. There are special rules and additional deductions available to truck drivers and other individuals who operate a business out of their vehicle.
The IRS allows taxpayers to deduct half of any business expenses incurred to entertain clients or business associates, including dining, tickets and other expenses. All deductions must be directly related or associated to the taxpayer's business.
Other Business Deductions
Medical Premium Payments: Self-employed individuals can deduct their medical insurance premium payments, but only if they do not have the option to participate in an employer-sponsored plan. Members of employer-provided plans cannot claim this deduction
Contributions to Health Savings Accounts: Any contribution to a health saving account (HSA) is deductible. Employer contributions on a taxpayer's behalf are also deductible, but only if they were included in the employee's compensation.
Teacher Expenses: Educators can deduct the costs of any teaching supplies or materials they pay for, up to a maximum of $250.00. This deduction is not available to post-secondary instructors.
Uniform Costs: Employees required to purchase and wear a specific uniform to work can deduct the cost of its purchase and dry cleaning. However, the uniform must not be wearable outside of work.
Union Dues: Employees required to join a union can deduct the cost of those dues and any other expenses related to their membership.
Job Seeking Expenses: Costs associated with finding a new job in a taxpayer's current field are deductible. This includes membership to job boards, employment agency fees and expense to create, print and mail resumes.
Continuing Education Costs: Tuition and fees associated with continuing education classes are deductible. There is no requirement that these fees be necessary to continue working in the taxpayer's current field.
Publications and Trade Journals: Subscriptions to journals, newspapers and other business-related documents are deductible. The taxpayer must have documentation that the subscriptions are solely for business purposes.
Office Supplies: Employees can deduct the amount of money they spend on office supplies for which they are not reimbursed. Usually, self-employed individuals benefit the most from this deduction.
Moving Costs: Taxpayers can deduct the costs of moving to be closer to work. This deduction, however, is only available if the taxpayer previously lived more than fifty miles away from their place of work.
Professional Charitable Services: Professionals can deduct the typical cost they would charge for any professional services they provide a charity. For example, an accountant who spends one hour completing a charity's tax return can deduct the normal amount they would charge for that hour.
Claiming Your Business Deductions
The IRS encourages every taxpayer to maintain records of any and all deductions they claim in a given year. Information about the types of acceptable records and what they must contain can be found in Tax Topic 305.
These deductions are offered to benefit taxpayers; if you are entitled to one, do not hesitate to claim it. If you are unsure of your entitlement, seek legal or financial advice from a knowledgeable professional.