BudgetEase Blog - Making YOU Profitable™

    Tax Deductible vs. Non-deductible Expenses: Small Business Bookkeeping

    [fa icon="clock-o"] Sep 17, 2014 9:16:00 AM [fa icon="user"] BudgetEase [fa icon="folder-open'] For Accountants

    Deductible or Not Deductible

    That is the question!

    Tax deductible business expenses can produce huge savings for companies and are very beneficial to small business owners who need the extra cash. The first question you need to ask is, “What is a tax deduction?” A tax deduction is a reduction of income for any item that incurs an expense to create income. These are called tax deductible expenses.

    So the next question is “What type of expenses are tax deductible?”  

    Ordinary & Necessary

    One thing every business owner must remember about tax deductible business items is that in order for the items to be deductible they must be both ORDINARY & NECESSARY expenses. Though there is no clear definition for what expenses are ordinary and necessary for a company, a good question owners need to ask themselves, “Is this item beneficial for the company and is it necessary for producing income for my business?” Internet or a stereo system for your home is not deductible but is a legitimate deduction if it is in your office. A limousine for our bookkeeping business fails the necessary rule and is not deductible. If you have a livery service it would qualify as a deduction.

    If you have doubt about the deductibility of your expenses ask an accountant or bookkeeper.

    Here are some examples:

    Deductible                          

    Not Deductible

    New Computer

    Family Vacations (not appropriate)

    Goods of Goods Sold (very appropriate)

    Traffic tickets    

    Advertising        

    Home Telephone Line

    Office Utilities

    Personal Expenses paid on company credit card

    Start Up Expenses

    Working during lunch (By yourself)

    Business Dinner with Client (50% Deductible)

     

    Principle Payment on a Loan (just interest is expensed)

     

    Health Insurance paid for by company (but not for sole proprietors)

     

    Country Club & Gym Membership Fees (helpful but not allowed)

     

    Food at Employee Meeting (if employees are Required and paid to be there)                

    Clothing you wear on the job (unless it is a required uniform)

    Football tickets/Loge given to clients   

     

    Charitable Donations

     

    Moving Expenses

     

    The following are often debated as either deductible or non-deductible due to a set of regulations that the IRS created to monitor these expenses:

    Auto Expenses:

    Stephen Fishman states that, “If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.” (http://www.nolo.com/legal-encyclopedia/top-tax-deductions-small-business-30176.html)

    Vacation and Travel Expenses for Clients:

    Rich Stym states, “On days when you are carrying out business, you may also deduct your “destination” expenses, such as hotel costs, 50% of your meal expenses, local transportation (including car rental), and telephone charges…On days when you are not working, destination costs cannot be deducted. Similarly, the costs related to a spouse or other companion accompanying you cannot be deducted unless that person is your employee and is traveling for a reason genuinely related to your business.” http://www.nolo.com/legal-encyclopedia/free-books/ebay-business-book/chapter23-7.html

    QuickBooks Online or QuickBooks Desktop? Download our checklist  to find out which version is best for your business

    BudgetEase

    Written by BudgetEase