Deduction – What a Wonderful Word

Whether you prepare your taxes yourself or have the assistance of an accountant or tax attorney it is to your benefit to be organized and list all the business expenses you have a good faith belief are deductions. Unfortunately, the IRS has already determined what are valid and proper deductions. As such, you cannot simply deduct what you feel is appropriate under your particular circumstance.

I have listed below some common concerns of what are proper business deductions and what are not. Utilize the below as guidance only and not as a substitute for an accountant or tax attorney.

Deductions are wonderful since they may be subtracted from gross income to arrive at taxable income. Taxable income is the tax base against which the appropriate rate is applied to arrive at a taxpayer’s tax liability before the application of any tax credits.
Generally, business deductions are the ordinary and necessary expenses of carrying on a trade or business. To be deductible, the expense must be appropriate and helpful to the taxpayer’s business.

Aside from the typical deductions that employers make for salaries such as advertising, or premiums paid for insurance, there are more interesting and commonly concerned deductions.

Entertainment expenses are one example. You can deduct for the cost of entertainment, amusement, or recreation if you can show that the cost is (1) directly related to the active conduct of a trade or business or (2) associated with such business if the expense is for entertainment directly before or after a bona fide and substantial business discussion. As with everything, exceptions apply and this deduction may be limited to 50% of such expense. However, there can be no deduction for any expense for an entertainment facility, i.e. swimming pools, tennis courts, or yachts.

Generally, there is no business deduction for club dues, whether the club is business, social, athletic, luncheon, or sporting. However certain club dues like the Kiwanis or Rotary clubs are deductible since they are professional or public service organizations and the organization’s principal purpose is not to conduct entertainment activities for members or their guests.
Entertainment-related meals are also generally not deductible unless you can show the expense was directly related to the conduct of a trade or business.

With regard to your car, expenses for gasoline, oil, tires, repairs, insurance, and depreciation are deductible for that part of the expense that is attributable to the business. In order to take a car expense deduction you should keep an exact record of all business mileage and an appropriate percentage can be determined to allocate what percentage is for business and thus deductible.

A fine or a penalty paid to a government for violation of any law is not a deductible business expense. Any illegal bribe or kickback paid to a government official or employee is not deductible.

Fortunately, legal expenses paid or incurred in connection with a business transaction or primarily for the purpose of preserving existing business reputation and goodwill are ordinarily deductible. A sole proprietor of a business may deduct, as a business expense, that part of the cost of tax return preparation as is properly allocable to the business.

Lobbying expenses paid to influence a legislator is not a valid business deduction. Political contributions are not deductible as a business expense.
With regard to one’s home, a taxpayer is not entitled to deduct any expenses of using his home for business purposes. However, they may if the expenses are attributable to a portion of the home or separate structure used exclusively on a regular basis as (1) the principal place of any business carried on by the taxpayer, (2) a place of business that is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of business, or in connection with the taxpayer’s business if the taxpayer is using a separate structure that is appurtenant to, but not attached to, the home.

Overall, the smart taxpayer must carefully keep careful records and constantly document all expenses. All documentation and substantiation of expenses will go a long way in the event of an IRS audit.

Although, the above gives a general flavor of what business expenses are deductible, it is certainly not intended to be a substitute for the need of an accountant or tax attorney.