Most new entrepreneurs ask they accountant this real common question: “Which expenses are deductible for my business?”
The answer I give to all my clients is: “Any expense that is necessary, ordinary, reasonable, documented, and legal may be deductible…”  …and what do these terms mean?
  • Ordinary: means it is commonly accepted in the industry and seen often with other businesses in the same trade
  • Necessary: means the expense was required in order to generate the business income or it was incurred as a consequence of the income producing activities. But it does not need to be indispensable in order to be deductible
  • Reasonable: this is very subjective, but in essence it means it is not lavish or extravagant
  • Documented: means that the taxpayer has the burden of proof to prove the expense existed, that the amount reported is accurate, and it has a true business purpose (necessary)
  • Legal: the expenditure cannot break any laws, be considered a bribe, or made in connection to an illegal activity / or activity in which the business does not gave the legal capacity to perform
It also also worth mentioning that there are 10 tax deductions very commonly missed, misused, and/or abused, and those are:
  • Home Office Expense: Frequently failing to document the square footage of the home, creating a business-only environment, and document its business purpose is the most common issue
  • Vehicle Expense: mixing personal and business use of vehicles and not properly tracking milage is a large are of non-compliance
  • Insurance: Specially with health and life insurance, which have very special rules in order to be deductible.. in many cases these may NOT be deductible if rules are not followed
  • Charity and Political Contributions: For pass-through entities, such as S-Corporations and Partnership/LLC’s, charity is “deductible” only on the persona return, but most taxpayers cannot get any benefit for it because of standard deductions.  Political contributions are NEVER deductible
  • Meals & Entertainment: the “entertainment” factor really affects the deductibility of this expenses. NOTE: in 2018, there are significant changes in the tax code for Entertainment expenses
  • Travel Expenses: frequently combining personal with business travel is a large priblem
  • Employees and Subcontractors: not properly correctly categorizing employees or contractors and reporting them as such; which may lead to large payroll tax penalties or disallowance of contractor expenses
  • Retirement and Deferred Compensation Plans: failing to include ALL the employees in the company plan and/or not taking advantage of the income deferral tax deductions
  • Proper Write-off: of open invoices/receivables that are deemed uncollectible, open bills/payables that will not be paid, and adjusting Inventory quantity/valuation. For ACCRUAL-BASIS taxpayers
  • Pre-startup costs: made before the business started and.or in connection to setting up the business.  Also some business owners tend to “cover” business expenses with personal funds or personal credit cards (outside of the business bank accounts) and forget to register it in the business books
Here is a 55-minute video I recorded to explain all these in detail:

 

Lastly here are other common business deductions not covered in this “top 10” (including what is “not deductible”) in this article.And some other ideas:

 

WARNING: THIS IS NOT TAX ADVICE!!!
Always refer to your tax professional about your specific circumstances that may or may not be relevant based on the information listed above.

Hector Garcia, CPA
4474 Weston Road, #134
Weston, FL 33331
954-414-1524
hector@garciacpa.com

 

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