Tax deductions for business expenses are the subject of many a joke for small business owners and their families. Going out to dinner “on the company” is often a cause for celebration, and virtually everything can seem to become a business expense if one tries hard enough.
While tax deductions for business expenses can be a perk of owning a small business, the reality is that the scope of such deductions is much narrower than many people initially realize. And without paying attention to the specific rules that apply to business deductions, business owners can find themselves at risk of an audit – or worse.
In order to claim an expense as a deduction on your business taxes, the expense must be a legitimate expense that is an ordinary and necessary part of running your business. Thus, if you own a printing company, ordinary and necessary expenses will include things like printers, ink, and paper.
If you are in the retail business, this can also include the cost of inventory that must be purchased. Likewise, businesses can frequently deduct expenses like rent, improvements that must be made, as well as other capital investments.
Where things get more tricky is when the ordinary and necessary expenses of business include travel, meals, and other costs that can quickly go from business to personal. For example, the ordinary expense of a consulting gig will certainly include travel, but not any personal adventures that the consultant may tag on during that travel time.
While business and pleasure may frequently overlap, IRS auditors will not look kindly on allowing your tax deductions to include both. Instead, such expenses must be kept strictly separate.
Sometimes this is fairly easy to do. Traveling to San Francisco for work will be a business expense, while traveling to New York for a wedding is purely personal. But what if you head to Washington, D.C. to do both? Or what if you have an item, like a computer, that serves both personal and work functions?
As long as travel is primarily for a business purpose, it can still be deducted as a business expense, even if a few additional days of personal enjoyment are added on. However, business owners must make sure that the number of workdays exceeds the number of personal days, or the trip won’t count as a business venture.
Similarly, if you have items like a home office, computer, or cellphone, that is used personally as well as for business – you can deduct the expense of these items, but only in proportion to how much you use them for work. For example, if you use your laptop for work 50% of the time, half the price can be deducted.
Business expenses are an important deduction that any business owner should attempt to maximize, but very careful attention must be paid to keeping things honest and clearly documented. Keep receipts and good records of your business travels in case they are needed down the road, and err on the conservative side when considering what to deduct.
At Romano & Sumner, LLC, our tax attorneys are available to review your books and expenses in order to maximize deductions and minimize the risk of an audit. We proudly serve the Sugar Land, Houston, and the surrounding areas. For more information, contact us online or at 281-242-0995.
Romano & Sumner, PLLC