What you need to know about tax-deductible business expenses

One of the first questions a small business owner usually has is “what business expenses are deductible on my taxes?” If you’re looking for an exhaustive list of deductible expenses, I’m sorry to say, but there isn’t one. What is deductible in one industry or business isn’t necessarily deductible in another business. However, the IRS has given us some guidelines as to what is deductible and tips on how to document that. 

Ready to find out more? Let’s dive in!

What can I deduct? 

The main guidelines the IRS gives for tax-deductible business expenses are that they must be ORDINARY and NECESSARY. “Ordinary" means that most businesses in your industry have that same kind of expense. “Necessary" means that the expense is essential for operating your business. My favorite extreme example of this is a private jet. A local florist probably doesn’t need a private jet to deliver their flowers around town. But FedEx and UPS? They absolutely do! (How else do we get our packages within two days?) The jet would be deductible for FedEx and UPS, but not for a local florist. 

One thing to keep in mind is this: If you’re audited, it doesn’t matter what you thought was deductible or what I thought was deductible. It will only matter what the IRS agent believes is deductible! The best we can do is have a solid business reason for the expense and document it. 

Common question areas

Meals & Entertainment 

In 2017, this category underwent drastic changes from what long-time business owners might remember. The Tax Cuts and Jobs Act (TCJA) took away the deduction for entertainment expenses. This means that tickets to entertainment for clients, such as baseball games or opera tickets, are no longer deductible. The meals deduction is still available, though. However, it is only deductible at a 50 percent rate. If you purchase tickets to an event where food is provided, you can only deduct the food portion from that ticket price, and even then, only 50 percent of the total food and beverage costs. 

Meals and entertainment is a category of business expenses where people tend to go overboard with the amount they spend and how much they wish to deduct from their income taxes. Be careful with these. You can easily eat up your cash on these expenses, which are only 50% deductible. 

One caveat that is good news for some businesses is that if your company has a promotional event for the public or a company party or celebration, the related expenses are all 100% deductible. The key to any deductible item in this category is that you can prove what the expense was, when it happened, and why it was necessary. But I’ll get into more detail on that in a minute! 

Mileage

This is another category where you need to be careful not to try to claim too much on your taxes. Not all mileage is deductible! For example, your commute from your home to your place of business is not deductible. 

If you go from your office to a meeting, or do other types of travel related to your business (such as driving to professional development from your office), you can count it all on your taxes as a justifiable expense. At 70 cents per mile, your mileage is definitely worth the trouble of tracking it throughout the year. You will need to track the date, time, mileage, and reason for the trip each time. 

I suggest using an app on your phone that tracks all the necessary information for you. Whatever you do, don’t just guess! You must have a provable record at the time of each trip; otherwise, it might not be allowed during an audit.  

Large Expenses

Another somewhat confusing expense category is when you purchase something large for your business, such as a car or a piece of equipment. In general, you can’t deduct the entire expense all at once. You have to deduct part of the expense over each year of its useful life. For example, if you spend $10,000 on something that is expected to last 10 years, you can deduct $1,000 every year for each of the 10 years. 

An exception to this rule is if you use Section 179. Section 179 allows you to deduct the entire cost of the property in one year. Ask your tax preparer if your purchase counts towards this rule. This rule is another reason you should meet with your tax preparer before the end of the year, so you know what property or equipment qualifies and what other information you will need if this rule applies. 

Document, Document, Document! 

No matter what the expense, you will need to document not only what the expense is, but why it was necessary for it to be tax-deductible. 

First of all, keep all receipts. I recommend keeping an electronic record of them if possible. You will need to write on each receipt the name of the involved client and what the expense was for, and the business purpose of the expense. The receipt must also include the date and/or time the expense happened. 

Keeping documentation will increase your chances of having the expenses approved if you are ever audited. Remember, my opinion and your opinion don't actually count. The only one that counts is the auditor's opinion. Hopefully, you won't get audited, but if you do, your chances of an expense being allowed are greater if you've kept this documentation.

Need help?

Have questions or wondering how to classify some of your expenses? Make an appointment on my calendar, and I’d love to help.