A comprehensive guide to writing off business expenses for startups

As a business owner, you know you should take advantage of write-offs when it comes to business expenses. It's what savvy entrepreneurs do. But what defines a business expense? And what exactly should you write?  

You’re not a tax professional, and that’s OK. That doesn’t mean you have to figure it out alone. The process is relatively simple when you understand what write-offs are and you have the tools to track and manage them.

What are business expense write-offs?

Business expense write-offs, or tax write-offs, are business tax deductions that reduce your company’s taxable income. This ultimately reduces your annual tax burden. The biggest mistake business owners make is trying to write off an ineligible expense. The IRS has very specific rules about what qualifies for write-off.

The idea behind write-offs is that you shouldn’t pay taxes on money you use to grow your business. So, you can only write off capital expenses for business purposes.  For example, you can write off the cost of business cards on your business tax return, but you can’t write off the cost of your personal vacation, no matter how much you might need it after launching your business.

How write-offs contribute to cash flow and growth

Take advantage of write-offs in your startup. They can contribute to significant growth in your company. Here’s how:

• Reduced Tax Liability: Write-offs reduce the amount of money you pay in taxes. That means your company will retain more of its income for use toward growth.
• Improved Cash Flow: With less money flowing toward the IRS, you’ll be able to show decreasing outflows of cash, leading to better cash flow retention.
• Resource Allocation: When you allocate fewer resources to your tax burden, you’re able to allocate more resources to staff, marketing, and other factors that will assist in the growth of your company.  
• Improved Risk Management: With a lighter tax burden, you’re able to allocate more funds to your company itself, reducing financial risks.

Key business expenses eligible for write-offs

Only business-related costs are eligible for write-offs. The IRS refers to them as "ordinary and necessary" for your trade or business. Here are some of the most important write-offs to consider:

• Business Startup Costs: This includes organizational costs, startup materials, intellectual property costs, and any other cost associated with getting your startup off the ground.
• Office Expenses: You can also write off the cost of rent for your office, your office supplies, office furniture, computers, and other office-related expenses.
• Marketing Expenses: This includes any marketing expenses from radio and television ads to digital media expenses, billboards, bus bench advertising, and more.  
• Employee Expenses: You can write off 100% of your employee payroll expenses.
• Business Travel Expenses: Any time you travel for your business, you can write off the cost. This may include the cost of rental cars, fuel, airfare, hotels, meals, and more.
• Employee Benefits Packages: If you offer fringe benefits to your employees, you can write the cost of those benefits off. For example, health insurance and retirement plans are both eligible for write-offs.

Pro Tip: Look for tax credits specific to your business. There are several credits available, ranging from clean energy to employee diversity credits and more.  

Business expenses that are not eligible for write-offs

You may not be able to write off everything you want to write off. You can only take business deductions for business expenses. So, you can’t write off things like:

• Your Mortgage Payment: You can’t write off the total cost of your home, even if you have a home office. However, you can write off a percentage of your home. For example, if you have a 2,000-square-foot home and you use 400 square feet to conduct business, you may be able to write off 20% of your mortgage as a home office deduction.
• Personal Vehicle: You can’t write off the cost of your personal vehicle either. However, if you use your vehicle to conduct business, you can write off the cost of using it. The best way to do so is known as the actual expense method. This method tracks what you actually spend while using your vehicle for business purposes. The IRS provides yearly standard mileage rates to help you calculate your write-offs.

The key here is to keep your personal expenses separate from business expenses as much as possible. When that’s not possible, you’ll need to determine what percentage of the expense was related to personal purposes and what percentage was related to business purposes.

How to deduct business expenses for your startup

The best way to deduct business expenses for your startup is to take advantage of software solutions. However, you can also do so manually, but you do run the risk of both human error and general misunderstanding of the tax laws. If you want to try the manual method, follow the steps below to get started.

Categorize your expenses

Start by categorizing your expenses. The most common categories include:

• Fixed Expenses: These costs will be the same each period and include things like rent and software licensing.
• Variable Expenses: These costs will change each period. These include things like utility bills, employee costs, and marketing expenses.
• Periodic Expenses: These costs only happen from time to time. This may include new equipment purchases, consulting fees, and other one-off expenses.    

Calculate your deductions

Next, it’s time to calculate your deductions. If you haven’t muddied the waters of business and personal expenses, this will be as easy as adding up all of your direct business expenses. However, the process may be more complicated if you use personal assets for business.

You’ll need to calculate things like the percentage of your mortgage, electricity bill, water bill, internet bill, and other expenses that should be considered personal and which are eligible for write-offs. Consider consulting a tax professional for help with this.

File your taxes

Finally, fill out and file your tax forms using the information you’ve created from the two steps above. If you’re not comfortable filing your tax forms on your own, that’s OK. There are plenty of business accounting professionals that can help. Moreover, software solutions can take the questions out of the process for you.

Get expert assistance with your business taxes

Tracking and managing business expenses for tax purposes is a lot to manage. But not taking advantage of your write-offs leaves a lot of money on the table you could be using to sustain and grow your business.

You're the type of savvy entrepreneur who knows when to bring in outside help. Whether you’re a sole proprietor or the founder of a bustling startup, your time may be better spent doing things to help your company grow rather than tracking dollars and cents for tax purposes. 

Keep all of your financial data clean and tidy, 24/7 with a financial platform that does the tracking for you. If the IRS comes knocking, you'll always be ready for them.

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