SOMERSET, NJ - Now that tax season has officially ended, I am plagued with questions from new and veteran business owners on what expenses can be deducted.

As a business owner, operational duties and responsibilities can be daunting. Determining what expenses are deductible and what supporting documents to keep adds another element of stress.

As a general rule, business owners can deduct the cost of running a business. The IRS specifically states that the business expense must be both “ordinary and necessary”.  

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“An ordinary expense is common and accepted in your field of business, trade, or profession.” This simply means that things that are typical in the industry and commonly used to operate the business are deductible.  The ordinary expense must also be necessary to be deductible.

Per IRS, a necessary expense is one that is helpful and appropriate for your business, trade, or profession.  That simply means that the expense is helpful and appropriate for running your trade or business.  All necessary expenses must also be ordinary to be deductible.

Most expenses business owners incur to operate your business will be deductible.

Commonly Deductible Expenses

Advertising 

Depreciation

Mortgage

Rent or Lease

Travel & Entertainment

Car & Truck Expenses

Employee Benefit Program

Legal & Professional

Repairs & Maintenance

Utilities

Contract Labor

Insurance

Office Expense

Supplies

Wages

Commissions & Fees

Interest

Pension & Profit Sharing

Taxes and Licenses

 

 

Usually Non-Deductible Expenses

Fines & Penalties

Commuting Costs

Political Contributions

Business Gifts over $25

Business Clothing

Extravagant Expenses for Travel & Entertainment

   

Cost of Goods Sold, Capital Expenses, Personal Expenses

In some circumstances, the expenses incurred may be both ordinary and necessary but may not be deductible in the year incurred or may not be deductible at all.   Business owners will need to distinguish between cost of goods sold, capital expenses, and personal expenses.

If a business manufactures or purchases products for resale, the value of inventory must be assessed at the beginning and ending of the tax period to calculate the Cost of Goods Sold.  The Cost of Goods Sold is deducted from Gross Income to get Gross Profit.  

Since inventory purchases are made throughout the year, only the value or Cost of the Goods Sold (what is sold during the tax year) is deductible (not the amount paid to purchase the inventory).  If the cost of goods sold is deducted, a business owner can’t also include that as a business expense.

A business owner must capitalize versus deduct some expenses.  This simply means that the total expense will be spread out over time versus being deducted in the year incurred.  These capital costs are investments in the business and are called capital expenses.  Capital expenses are assets.  There are usually three types of capital expenses and they are start-up costs, business assets (equipment, machinery, furniture, trucks, patents, franchise rights, etc.) and improvements (electrical wiring, plumbing, new roof, bricking, etc.).  

Generally personal expenses related to family and living are not deductible.  In some situations, a business owner may have an expense for something that is used partly for business and partly for personal purposes, the portion related to the business is deductible in the year incurred.

For more information on business expenses and the deductibility, please see IRS Publication 535. 

https://www.irs.gov/pub/irs-pdf/p535.pdf

Carletta Beckwith CPA LLC is a firm that provides premiere income tax preparation, tax planning, and financial planning services. Carletta Beckwith is a licensed CPA and CFP® and shares her extensive industry knowledge to deliver superior customer service and personalized attention to her clients.  To learn more about the services she provides visit www.beckwithcpa.com.

IRS Circular 230 disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.  

Disclaimer: Nothing in this document should be relied on and you should seek professional advice if you are in need of tax information or advice.  This publication should not be a substitution for personal tax advice as every tax situation is different.  You should obtain personal tax advice from a Certified Public Accountant or other tax professional to address your specific tax needs.