One of the great advantages of a owning a business is being able to deduct numerous expenses for your income taxes. Advertising expenses, meals, interest expenses, and other expenses related to your business can be claimed as deductions. However, you can’t just claim any expense that may only be slightly related to your business.
Ordinary and Necessary
There are two generally well-defined qualifications for a deductible business expense to be allowable, ordinary and necessary. Essentially, an ordinary expense is one that is common and accepted in your industry. Necessary expenses are considered ones that are helpful and appropriate for your trade or business.
For example buying automotive parts for an auto repair shop would be considered ordinary expenses, but if a donut shop bought them, the expenses are not considered ordinary and would not be allowable as a deduction. However, if the donut shop regularly delivers its goods around town with a company-owned truck, the parts may be considered a necessary expense and ordinary for what they normally do as a business for deliveries, so it may end up as an allowable deduction.
Some things that can be claimed as deductible business expenses:
- Travel related expenses, including fare and lodging costs
- Meals & Entertainment (only up to 50% of the cost)
- Transportation expenses, including gas and some repairs
- Costs directly related to starting up a business
- Depreciation costs of business assets
- Interest expenses
- Bad business debts
- Operating losses
Personal and business expenses
Sometimes, personal and business events may overlap, such as traveling for business and spending some time while traveling on personal matters. In order to claim deductions on the business related expenses, you will need to separate the personal expenses from the business ones. Keeping good records and details, such as notes regarding business meetings and the purpose for it, will always help justify your deduction claims in case the IRS may question them.
There are additional rules and considerations that go into claiming deductions appropriately for more complex expenses such as depreciation expenses or bad business debts. Those issues take a little more individualized attention, which our firm can certainly assist you with. MiklosCPA is a California accounting firm focused on helping businesses with their back-room accounting and taxation needs. We utilize the latest in cloud-based technologies with personalized services to reflect your business’s plans. If you are interested in learning more about our services, give us a call! We also post tax and other accounting “good to know” articles regularly. Follow us on our social media pages for future updates!