What Document Lets You Subtract Business Expenses From Income?

Understanding how to properly subtract business expenses from income is essential for maximizing tax efficiency and ensuring compliance with financial regulations. This process reduces taxable income and supports a business’s financial health.

The Key Filing Document

When deducting business expenses, the primary document is IRS Form 1040, Schedule C, “Profit or Loss from Business.” This form is essential for sole proprietors and single-member LLCs to report income and expenses, determining the net profit or loss. It requires details about the business, including its principal activity, business name, and Employer Identification Number (EIN), if applicable.

Schedule C itemizes various business expenses, such as advertising, car expenses, office supplies, and utilities, ensuring all deductions are accounted for. For instance, Line 9 covers car and truck expenses, calculated using either the standard mileage rate or actual costs. The IRS updates the mileage rate annually, which for 2024 is 65.5 cents per mile. This structure helps maximize deductions while adhering to IRS guidelines.

Businesses with significant capital investments may also need to file Form 4562 to claim depreciation and amortization deductions. This form allows businesses to spread the cost of assets over their useful life, reducing taxable income. The Modified Accelerated Cost Recovery System (MACRS) is commonly used for depreciation, so understanding recovery periods and conventions is important.

Categories of Expenses to Deduct

Understanding deductible business expenses requires recognizing what qualifies under IRS guidelines. Allowable deductions must be ordinary—common in your field—and necessary—helpful and appropriate for your business. For example, travel expenses for business purposes, like airfare, lodging, and meals, are deductible, though meals are limited to 50%.

Employee-related expenses form a major category of deductions. Salaries, wages, bonuses, employer-paid health insurance, and retirement contributions are fully deductible. Costs for employee training and development programs are also deductible, encouraging businesses to invest in their teams while reducing taxable income.

Home office expenses are increasingly relevant with the rise of remote work. The IRS allows deductions for home offices used exclusively and regularly for business purposes, covering a portion of rent or mortgage interest, utilities, and insurance. The simplified home office deduction offers $5 per square foot up to 300 square feet as an alternative to calculating actual expenses.

Documentation to Retain

Keeping accurate records is crucial for substantiating expense deductions and complying with IRS regulations. Businesses must retain documentation like receipts, invoices, canceled checks, and bank statements to support reported income, deductions, and credits. These records create a clear audit trail.

Digital tools streamline recordkeeping. Software like QuickBooks or Xero integrates with banking systems to categorize expenses automatically, reducing administrative tasks and improving accuracy. Features for attaching digital copies of receipts to transactions make retrieval easy, while cloud storage solutions secure backups against data loss.

For travel and entertainment expenses, detailed logs are essential. These should include the date, amount, business purpose, and participants. The IRS closely scrutinizes these deductions, so thorough documentation minimizes the risk of disallowed expenses. Businesses should also note the statute of limitations for tax returns—typically three years, but up to six if income is underreported by more than 25%. Long-term record retention is key.