Knowledge Base

What "tax-deductible" expenses are and how they differ to non-deductible expenses on how it effects the clients financials and tax implications

Is it Deductible…or not?

Tax deductible expenses are expenses that a business can deduct from its income before being subject to tax. This can provide huge savings for businesses and chances are small business owners can use the extra cash. Non-deductible expenses are ones that cannot be deducted from income when calculating tax. It is vital for small businesses to understand the difference of what is and is not included. So by now you might ask, what expenses are tax deductible?

Tax Taxes GIFfrom Tax GIFs

Ordinary & Necessary

There is one thing every business owner must know when classifying tax deductible expenses: in order for the items to be deductible they must be both ordinary & necessary. The definition of ordinary and necessary may not be very clear, a better question owners need to ask themselves is “is this item beneficial for the company and is it necessary for generating revenue for my business?” For instance, internet for your home is not deductible but is a legitimate deduction if it is in your office. A limo for your bookkeeping business fails to meet the necessary rule and is non-deductible. However, if you were to have a livery business it would qualify as a tax deductible expense.

Here are some examples:

Deductible	Non-Deductible
Advertising	Personal Expenses paid on company credit card
Start Up Expenses	Traffic tickets
New Computer	Home Telephone Line
Office Utilities	Family Vacations
Cost of Goods Sold	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
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 given to clients
Charitable Donations

The following expenses are either deductible or non-deductible due to regulations the IRS has set to monitor these expenses:

Vehicle Expenses:

The IRS states in Publication 463, if you use your vehicle for business purposes you generally two options to figure your deductible expenses using either the standard mileage rate, or actual car expenses. Also if you use the vehicle for personal use as well as for business, only the portion used for the business is considered a tax deduction. This means you must keep track of all expenses/mileage and percent of time it is being used for business at the end of the year. (Topic No. 510 Business Use of Car | Internal Revenue Service (irs.gov))

Travel Expenses:

For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business. The type of expense you can deduct depends on the facts and your circumstances. This chart illustrates expenses you are able to deduct when you are traveling away for business. “If your trip was primarily for business and, while at your business destination, you extended your stay for a vacation, made a personal side trip, or had other personal activities, you can deduct only your business-related travel expenses.” Similarly if a spouse, dependent, or other individual accompanies you on the trip, you cannot deduct their costs unless that person is an employee and has a business purpose for the travel.

If you have any doubt, consult with your accountant or tax advisor about the deductibility of these expenses or book a tax planning call with us if you're already a tax client.