Which Business Expenses Can Reduce Taxable Income for American expats

One of the most frequent questions business owners ask is which business expenses they can deduct to reduce their taxable income. If you are a US taxpayer with a business, either in the US or abroad, you can deduct a variety of expenses, but you need to identify and track them properly.

To learn more about business taxation in general, check our out Business Tax Guide For Expats.

Which Expenses Are Tax-Deductible?

Under IRS Publication 535, a business expense is deductible only if it is both ordinary and necessary.

What does this mean?

In plain terms, an ordinary expense is one that is common and accepted in your field. A necessary expense is one that helps you operate or grow your business. Personal expenses or costs that do not serve a clear business purpose are never deductible.

These are the most common business expenses:

1. Advertising and marketing
2. Payments to contractors, salaries and professional services
3. Taxes and licenses
4. Office expenses and utilities
5. Vehicle expenses
6. Travel and meals
7. Depreciation of equipment and property
8. Other expenses

Let’s explore these potential deductions in more detail.

Advertising And Marketing Expenses

Advertising and marketing expenses include the costs of promoting your products, services, or brand to attract and retain customers.

These costs are fully deductible as long as they are directly related to your business.

Some qualifying expenses include business cards, advertising in print or digital media, promotional events, and email newsletters. You can also deduct cost for SEO services or the design of marketing material.

Expenses that build goodwill or reputation, such as community sponsorships, can also qualify if they benefit your business.

Payments To Contractors, Salaries, Professional Services

You can deduct the cost of hiring and compensating people who perform work for your business, whether they are employees, independent contractors, or professional service providers.

Deductible payments include:

• Employee wages and bonuses
• Fees for professional services such as accountants, lawyers, or consultants
• Independent contractors such as developers, writers, or designers
• Payroll taxes, benefits, and employer contributions

The IRS makes a clear distinction between employees and contractors:

• Employees work under your direction and control. They are on payroll, receive benefits, and are issued a Form W-2 at year-end.
• Independent contractors control how they perform the work and are paid per project or service. US-based contractors must receive Form 1099-NEC if paid $600 or more during the year.

Professional fees are fully deductible as long as they are directly connected to running your business.

Hiring an attorney, bookkeeper, or tax professional to prepare your returns or manage compliance is considered an ordinary and necessary business expense.

Taxes And License Expenses

You can deduct most taxes and licensing fees that are directly related to your business operations. These include:

• Sales taxes that you, as the seller, pay on goods or services (not those collected from customers)
  Real estate or personal property taxes on business assets
• Business licenses and annual registration fees required by state or local authorities
• Employer payroll taxes, such as Social Security and Medicare contributions you pay on behalf of employees
• Excise or franchise taxes related to doing business in certain industries or states

You cannot deduct federal income tax, penalties, or interest owed to the IRS.

Tip: Keep proof of every payment, especially local and foreign licenses if you operate abroad. Many countries require annual renewals, which are deductible in the year they’re paid.

Office Expenses

It can sometimes be confusing, which office expenses you can deduct from your business income, as many work from home.

When you own or rent a separate space as an office, all the expenses are directly connected to the business. However, if the office is located in your home, the expenses paid for the entire property will be indirect expenses.

A home office is a space in your home that you use exclusively and regularly for conducting business. (Hence, your kitchen table wouldn’t count.)

How to determine the percentage of your home used exclusively and regularly for conducting business?

Example

You live in a 1000 sq ft home and devote 400 sq ft to your business activities. You can consider for deductions 40% of indirect expenses such as mortgage interest or rent, property insurance, utilities, and depreciation.

Office expense deduction show how important it is to keep track of which expenses are directly or indirectly related to your business.

US persons living abroad who qualify for foreign earned income exclusion may be able to exclude the portion of rent and utilities considered as personal use through the foreign housing exclusion. But they cannot use the foreign housing exclusion to exclude the home office space, and then deduct it again as office expense. No double dipping!

Mortgage interest paid for other business properties to a bank or other financial institution is also a deductible expense.

Vehicle Expenses

The IRS provides two different methods to calculate vehicle expenses deduction:

1. The standard mileage rate method, or
2. The actual expense method.

You may qualify for one or both options.

Standard Mileage Rate Method

This method allows you to deduct a fixed amount per mile driven for business. The rate is updated annually.

For example, the business rate is 67 cents per mile for 2024 and 70 cents per mile for 2025. Always confirm the current rate on the IRS website before filing.

To use this method, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses.

Actual Expense Method

This method requires you keep track of all the expenses you incurred and of the total miles driven both for business use and personal use, if any.

Similar to home office expenses, you determine your vehicle’s percentage of business use and calculate the expenses allocated to it.

Actual expenses can include:

• Depreciation
• Licenses
• Lease payment
• Registration fees
• Fuel
• Parking and garage fees
• Tolls
• Insurance
• Tires

If you don’t own a vehicle and use Uber or other rideshare apps to go to your office (or co-working space) or to business meetings, you can deduct those expenses. Make sure you pay and track them separately from your personal trips.

Depreciation Of Equipment Or Property

The purchase of assets such as computer equipment, vehicles, machinery, or real estate properties is not a direct expense that you can deduct. But you can take advantage of time and depreciation expense.

To calculate the depreciation, you will need to state the date the asset was placed in service and the value. Each type of asset has a different expected life and method to use for the calculation.

When selling an asset used to generate income, you must use the depreciated value of the asset as the cost-basis even if you did not claim a depreciation deduction. Then, why not use it to reduce your income?

Travel And Meals

Tracking and determining deduction eligibility of travel and meals expenses can be a headache for anyone. As mentioned at the beginning, business expenses must be ordinary and necessary, and can’t be for personal purposes.

Business travel means from and to your place of business. This makes it murky for digital nomads, as they usually don’t have a fixed place of business. Let’s say you run your online business for 1 month from Medellin, Colombia. Then you move on to Buenos Aires, Argentina, and work from there. The travel from Medellin to Buenos Aires does not count as a business travel expense.

Almost every person travelling away from their home for a business trip incurs in some personal expenses such as visiting museums during their free time or taking some extra days for vacation.

Therefore, you must allocate your travel time and expenses on a day-to-day basis between business days and nonbusiness days. It is important to keep good records and a detailed calendar for when tax season arrives. The IRS provides additional rules and some exceptions on Publication 463.

Actual travel and meal expenses includes costs such as:

• Lodging
• Airfare or train tickets
• Taxi or rideshare fare (Uber, etc)
• Public transportation
• Business and non-entertainment related meals
• Business calls
• And more.

The temporary 100% deduction for certain restaurant-provided business meals has expired. For 2023 and onwards, most business meals are limited to a 50% deduction, if they meet IRS requirements (not lavish, you are present, and directly related to business).

Per Diem vs Actual Expenses

There is a simplified method for travel deductions that allows you to claim a standard allowance instead of actual expenses. This is called per diem.

Per diem rates are fixed location-specific amounts to compensate for travel expenses such as accommodation, meals, and incidental expenses. You can find when per diem deduction is convenient and how to use it in our prior article Should International Business Travelers Use Per Diem Travel Expenses?

Other Common Business Expenses

You may incur other expenses while running your business that can reduce your taxable income. To name a few:

• Training and education
• Rent of equipment, machinery or other business property
• Software purchase or subscription
• Internet and web housing
• Insurance premiums (other than health)

The list can go on. If the business expense is both ordinary and necessary, it is worth to analyze whether it is deductible or not.

Business Expenses Vs Cost Of Goods Sold

In case your business manufactures products or purchases them for resale, it is important not to mistake cost of goods sold with business expenses.

Cost of goods sold (COGS) includes inventory already owned, cost of labor, materials and supplies. Deduct this from your gross receipts to calculate the gross profit of your business.

The key is to never include an expense both in the cost of goods sold and in the business expense section.

How To Claim Business Expenses Correctly On Your Tax Return

Organized records make it easier to prepare a tax return. Keeping records, such as receipts, canceled checks, and other documents that support a deduction is vital. If possible, avoid co-mingling business and personal expenses. Do not use your business credit card for purely personal expenses.

Consider having a bookkeeper (which is a deductible expense), or at least use a bookkeeping software.

IRS Documentation Rules for Business Expenses

The IRS requires detailed proof of every expense you deduct.

Keep digital or physical copies of receipts, invoices, canceled checks, and mileage logs. Maintain separate business accounts to avoid co-mingling funds. For larger purchases (like equipment or software), record the purchase date and how the item is used for business.

If you run your business from abroad or own depreciable assets, hold on to your records a bit longer, three years is the minimum, but keeping them beyond that can save you trouble later.

FAQs About Deducting Business Expenses for Expats

Which business expenses are most commonly missed by expats?

Many expats forget to deduct costs like software subscriptions, professional fees for accountants or legal advice, and online tools used for work. These are legitimate business expenses if they are ordinary and necessary for your trade.

Can I deduct business expenses paid with a personal credit card?

Yes, as long as the expense is directly related to your business and you can document it. Keep receipts and separate records to avoid mixing personal and business charges.

How do I handle foreign currency when claiming business expenses?

Convert all amounts to US dollars using the exchange rate in effect on the transaction date. The IRS allows using an average annual rate for recurring expenses.

Can I deduct expenses for international travel?

Yes, if the trip was primarily for business. You must separate personal and business days and deduct only the portion tied to work. Keep a calendar and all receipts for transportation, lodging, and meals.

Are business meals still 100% deductible?

Only certain meal expenses qualify for a full deduction. For most situations, meals are 50% deductible unless they are provided by a restaurant for business purposes during 2024, when the temporary 100% rule still applies.

What if I work as a contractor abroad, can I deduct local taxes or social security?

You may deduct or credit foreign social contributions and taxes depending on the country’s tax treaty with the US. Always verify eligibility before claiming to avoid double-counting with the Foreign Tax Credit.

Do I need to file anything extra if I reimburse myself from an S Corporation?

Yes. If you run an S Corporation, use an Accountable Plan for reimbursements. It ensures your business expense reimbursements aren’t treated as taxable wages on your W-2.

More Ways To Save Taxes With Business Expenses For S Corporations

As a business owner that draws a salary from the business, be aware of how expense reimbursements are taxed. When you reimburse yourself for a business expense, the reimbursement is added to your taxable income and reported on your W-2.

As an S Corporation owner, you can tax-optimize your business expenses by using an Accountable Plan. With an accountable plan, an advance or reimbursement of a qualifying business is not reported as wages.

Finding a US tax expert who truly understands your business situation, optimizes the deductions, and does the math for you makes the difference.

For more information to optimize your tax situation, schedule a consultation with our accountants.