The tax code defines business expenses as those which are “ordinary and necessary” in the normal line of business. As a business owner, you may not know exactly what ordinary or necessary are, especially given the way the Internal Revenue Service (IRS) can twist words. For this reason, working with a tax professional is the easiest way to properly claim your business expenses, reduce your tax burden, and to see a greater return. If you do decide to prepare your own taxes, here’s a brief FAQ on how to deduct expenses.
What can be declared as a business expense?
There are a number of business expenses you can declare. For example, if you drive 20 miles each day to work, or if you spend money to purchase equipment for work, you can deduct gas and expenses for company equipment. You can also deduct expenses such as utilities and cell phone bills if employees use company phones. Further reduce your tax burden with insurance and vehicles which staff use to perform their job on a daily basis.
What can’t you deduct?
Now, if your business is run from the comfort of your home, and you are driving to Starbucks each day for a cup of coffee, the gas you spend and coffee you purchase cannot be deducted. Similarly, if you work in an office setting and have to pay for dry cleaning for your clothing, unless it totals to an excessive amount annually and the company requires you to dry clean your clothing, these aren’t business expenses either.
How to decide?
If it isn’t necessary to do your job, and if it isn’t necessary to service your customers, it likely isn’t going to qualify for an expense. On the flip side, if you have to pay for gas in order to reach your clients each day, or if you conduct business on a cell phone each day and this is the only way to keep in touch with customers and employees, these are likely to qualify as expenses which are necessary and are ordinary in the normal course of your business.
Work with the professionals
When filing your taxes, you may not know exactly what qualifies as business expenses, which deductions you can take, and what doesn’t qualify as an expense. If you have any questions, it is in your best interest to work with an accountant. Not only will they help you properly file expenses, likely saving more than they cost in the process, but they will also help you avoid an audit caused by mislabeling the expenses you would otherwise declare. Tax professionals know which tricks are allowed and which expenses you can deduct that most people aren’t aware of. They can help you receive a greater refund, all while properly filing your expenses, and avoiding problems with the IRS.
Regardless of the line of work you do, or the type of business you run, the business expenses you declare are a great way to reduce your tax burden, and to see a higher return at year’s end.