Many business owners wonder just that; Is this business expense a tax deduction?
The quick answer is MAYBE.
I know that is not what most people want to hear, but it is the truth. What can be a tax deduction for one business, won't be for another.
Of course there are the standard business expenses and tax deductions like office supplies and your business license. But even those fall under 4 basic rules for business expenses, so let's look at those rules first.
The IRS tax code is long, tedious and time consuming to read. Some business expenses are listed clearly with a yes or no answer regarding if such expense is a tax deduction or not. But many are not, hence the four basic rules or guidelines for business expenses.
The expense must be incurred in connection with your trade or business
The expense must be ordinary
The expense must be necessary
The expense must not be lavish or extravagant under the circumstances.
There you have it, all you need to know about the subject of your business expenses being a tax deduction, right? (Don't you wish! But no, try again.)
Since I want to keep this blog post short, I won't get too detailed. I know as a business owner, you are super busy and need a quick read. (Unfortunately, tax code is anything but quick...LOL). So I will try to sum up in examples.
Incurred in connection with your business/trade: If you bought something to help you run your business, support your business or something to use in the profit of your business, then it is a good chance it is deductible. Example: I need a computer for my business. I am a virtual bookkeeper, so by definition, the very nature of my business is bookkeeping via a computer. I also need internet and reliable equipment (monitors, back up hard drive, etc) to run my business. Is my desk top, laptop a tax deduction. Yup.
Ordinary: Same example applies to this rule. Computers are necessary for most business, especially nowadays. Virtual or not, companies need computes. Totally ordinary.
Necessary: While the computer example can apply here, let's have a little more fun with this rule. Example: In my business, there is no need for me to have a fishing pole to effectively run my business by any stretch of the imagination. So there is no way I could deduct my new fishing pole I just bought, even if I used money from my business to buy it. However, I know of an organization that takes kids fishing for free as a service. If this organization, needs to buy a few new fishing poles, that is completely a legitimate tax deduction. (This could even fall under Cost of Services Sold, but I will leave COGS for another post.)
Must Not Be Lavish or Extravagant: I have many, many thoughts on this rule, but we won't go there. In short, this depends on the circumstances. Example: I run a small bookkeeping firm. My clients consist of mostly small businesses. I highly doubt I could deduct buying a large yacht for wooing potential clients for business. (Don't joke, it's been done.) However, a multi-million dollar business that sells exotic vacations on cruise ships could possibly get away with purchasing a small yacht to entertain future and new clients and claim it as a tax deduction. (yeah, I am not falling for it either, but I bet it has been done, promise).
I don't want to make this post too long, so I will close with this thought, if the purchase is made to help or support your business, is ordinary, necessary and it not extreme, then it is a good chance you can deduct the purchase from your taxes. (aka, you cannot expect to deduct the costs of your child's monthly video subscription and call that a valid business expense, even if you use it to keep your child occupied for a while so you can work and keep your sanity. Nope, not gonna fly, sorry!)
I hope this post has made the IRS tax code clear as mud for you. If you found this helpful, please let me know. As always, I suggest consulting with an accounting or a tax professional.
If you have any questions on this subject or other bookkeeping subjects, you can contact me at Rebecca@rhbizsolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success
RH Business Solutions
Any accounting, business or tax advice contained in these articles, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please seek consultation from the appropriate accounting/tax professional.