Definition of Allowable Business Expenses

Reimbursement for employee business travel is an allowable expense.

Allowable business expenses are those costs incurred by a business that help it produce revenue and earn income. Careful documentation of those expenses can produce a significant reduction in a business' tax liability, thereby lowering its overall operating costs. Computer software for efficiently recording and categorizing business expense is almost a necessity today, and there is a wide variety of packages available. Six broad categories of allowable expenses are employees, materials, facilities and utilities, vehicles and transportation, advertisement, and depreciation.

Employees

Wages, salaries, benefits and commissions paid to employees are all allowable business expenses. Reimbursement to employees for what the Internal Revenue Service (IRS) considers ordinary and necessary cost of meals, travel and entertainment directly related to the conduct of business are also allowable. Other employee-related allowable expenses are the cost of employee training and education, employee car allowances and per diem allowances.

Materials and Supplies

The costs of raw materials and supplies, including freight, that are used to produce goods and services are allowable business expenses. The costs of goods purchased for resale are also deductible. Many costs of this type are deducted from a business' gross receipts to determine profit and in that case they cannot also be used as business expense deductions.

Facilities and Utilities

Mortgage payments and rent for business facilities are allowable business expenses, as are the costs of electricity, water, natural gas and other utilities. If your home is used in your business, you may be able to deduct some of the costs of your mortgage, rent, utilities and repairs.

Vehicles and Transportation

Operating costs of business vehicles are allowable.

The costs associated with vehicles used to transport goods and/or deliver services are deductible. If you use your car for both personal and business purposes, you can deduct those vehicle expenses due to business use. The allowable expense is based on the actual mileage used for personal vs. business use.

Advertising

Promotional, advertising and marketing costs are allowable business expenses provided they are considered reasonable by the IRS. Money spent to influence legislators or lobbying is not deductible.

Depreciation

Depreciation of equipment is also allowable.

Assets usually decrease in value over time due to wear, age and obsolescence. Depreciation quantifies that loss of value over a set period of time, and it is an allowable business expense.

References

• BNET: Understanding Allowable Business Expenses
• IRS Publication 535, Chapter 11: Other Expenses
• Strong Business Credit Mentors: IRS Allowable Tax Deductions

Resources

• "Steps to small business start-up"; Linda Pinson, Jerry Jinnett; 2006