Maximizing Business Expenses: What You Can & Cannot Deduct
|By: Renee DaggettAll savvy business owners know how valuable deductions can be to their company’s bottom line. Lower income generally means a lower tax bill, so it’s important for entrepreneurs to maximize their business expenses to reap the benefits on their income tax return. Most expenses incurred as a cost of operating a business are deductible, but knowing which expenses you cannot deduct is crucial to keeping you out of hot water should you ever get audited.
Let’s start with understanding how business expenses are defined according to the Internal Revenue Service. To be deductible, a business expense must be both “ordinary and necessary.” An ordinary expense is one that is common and accepted in your industry, while a necessary expense must be considered helpful and appropriate for your business. There might be an expense that is ordinary and necessary for a manufacturer, but it might not be ordinary and necessary for a consultant. Do a gut check – if you can imagine sitting across from an IRS auditor, could you explain how a deduction would be ordinary and necessary for your business?
What Can You Deduct?
Here are some examples of expenses businesses often deducted. Contact your tax preparer to confirm for your specific situation:
What Can’t You Deduct?
The following costs are off limits as a business expense deduction on your tax return:
•Capital Costs – You must capitalize (or depreciate), rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Costs you capitalize include business start-up expenses, business assets and improvements.
Understanding what you can and can’t deduct as an expense of your business can be overwhelming. Obviously each reader needs to consult with their tax professional regarding their specific situation. Admin Books is here to help you navigate through the confusion. Give us a call for guidance or assistance.
•Job hunting expenses are deductible. Examples include newspapers purchased for employment ads, long distance calls, transportation costs to interviews, fees for legal or accounting related to employment contracts, career counseling to improve position in trade, cost of mailing resumes and the cost of recruiters.
•You may deduct the cost of your work clothes if your employer requires you to buy clothing that is specifically not made for everyday wear, such as uniform or clothing with a company logo. In other words, if you can also wear it in public, it is not deductible.
•When you donate money and get something in return, the value is NOT tax-deductible. For example, you donated money to a charity and you get “tickets” in return.
“A good PLAN is like a road map:
~H. Stanley Judd, Writer
Our Business Corner
Do you have questions on home office rules, auto deductions, charitable donations, etc.? Here is some information on those HOT TOPICS.
Do you like using keyboard shortcuts? If so, here is a cheat sheet of QUICKBOOKS KEYBOARD SHORTCUTS.
Take advantage of this helpful guide full of important BUSINESS TIPS.
Looking forward to connecting with you,