A high percentage of the questions a CPA gets this time of year, begins with the simple question. “Can I deduct that?”
Yes, if it is “Ordinary and Necessary.”
But what exactly do “ordinary and necessary expenses” include? This also depends on your business. For instance, if you own a retail store, the IRS wouldn’t expect to see meals and entertainment expenses, travel expenses or auto expenses taken as tax deductions. However, if you are in sales, those expenses could be expected, based on the assumption that you would regularly take clients out to lunch, drive to
meet with potential clients, and perhaps even travel out of town. Additionally, if you are in construction, you might have higher contract labor expenses, than a business that operates out of an office. That’s because companies with office workers typically pay employees a salary and withhold payroll taxes, whereas construction firms often use day labor.
Common deductions
This can be murky territory for business owners. Naturally, there are different variables and different deductible expenses depending on the type of business you have. The most common business expense tax deductions are for vehicle expenses, office supplies, internet costs, cell phone bills, home offices, and meals. The type of business that you are in would determine the amounts that would be ordinary and necessary.
To deduct these expenses, you must make sure to keep very good records. For vehicle expenses, you have to keep a mileage log detailing the mileage used for business purposes. Many smartphone apps can help you track mileage. For meal expenses, keep the receipt and jot down the name of the client with whom you dined with and what was discussed. For other deductions or for those you are uncertain about, it might be best to consult a tax advisor.
Then there is the Wrinkle in the IRS Tax Code!
But further guidance from the IRS — stating that an expense that “enhances your business” is also deductible — adds a wrinkle. It might not be easy to tell a necessary or ordinary expense for your business from one that enhances it. Things that enhance your business may include continuing education; assets and equipment such as computers, desks and telephone systems; advertising; and, for some businesses, vehicles. (But, of course, some of those also could be considered necessary or ordinary for certain businesses.)
Questionable deductions
So while you won’t automatically get audited for questionable deductions, it’s important to be as accurate as possible when deducting business expenses on your tax return. As a small-business owner, you must keep excellent records. And if you seek help from a tax professional, make sure to work with one who fully understands your line of business.
One of the ways we help our clients is by working hard to provide tax-smart investment strategies to minimize the impact Uncle Sam can have on your bottom line. We also consider it our responsibility to educate you about things that could affect your financial future. If you have any questions about your taxes or how tax-efficient planning can help reduce your tax burden, please give us call. We also recommend that you speak with a qualified tax professional who can advise you on the specifics of your personal tax situation.
Michael Tannery CPA CDFA™ AIF® ● CEO
Registered Principal
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