Wyatt-Martin & Associates Tax Tips: Deducting Business Expenses

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What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

 

Deductible Business Expenses:

  • Advertising expenses that arereasonable and directly related to your business activities.
  • Car and truck expenses.  The costs of operating a car, truck, or other vehicle in your business.
  • Commissions and fees.
  • Contract labor such as payments to non-employees (such as independent contractors) for services performed in your business.
  • Cost of goods sold.
  • Depreciation
  • Employee benefit programs such as accident and health, group-term life insurance, pension, and profit sharing plans.
  • Employees’ pay such as wages awards, bonuses, fringe benefits, etc.
  • Gifts You can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year.
  • Insurance
  • Internet-related expenses, including domain registrations fees and webmaster consulting costs.
  • Legal and professional fees that are directly related to operating your business.
  • Licenses and regulatory fees for your trade or business paid annually to state or local governments.
  • Mortgage interest on real property used in your business (other than your main home).
  • Office supplies and postage.
  • Penalties and fines.  Penalties paid for late performance or nonperformance of a contract.
  • Rent or lease of vehicles, machinery, equipment, or other business property.
  • Repairs and maintenance costs that do not add to the property’s value or appreciably prolong its life.
  • Subscriptions to professional, technical, and trade journals that deal with your business field.
  • Supplies and materials actually consumed and used during the tax year.
  • Taxes and licenses.
  • Tax preparation fees relating to the business portion of your tax return.
  • Travel, meal, and entertainment expenses
  • Expenses of traveling away from home for your business, profession, or job. These expenses include:  transportation, baggage and shipping, lodging, meals, dry cleaning and laundry, tips, etc.

 

  • Business-related entertainment expenses you have for entertaining a client, customer, or employee. Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.  These expenses cannot be lavish or extravagant under the circumstances.  These expenses may include:  taxes and tips relating to a business meal or entertainment activity, cover charges for admission to a nightclub, rent paid for a room in which you hold a dinner or cocktail party, and amounts paid for parking at a sports arena.

 

  • Utilities

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. (Examples include business use of your home or car.)

 

What Records Should I Keep?

You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record. You should also keep documentary evidence that, together with your record, will support each element of an expense.

Documentary evidence.   You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.  This evidence should show the amount, date, place, and essential character of the expense.

How To Prove Certain Business Expenses

IF you have expenses for THEN you must keep records that show details of the following elements
  Amount Time Place or
Description
Business Purpose
Business Relationship
Travel Cost of each separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories such as taxis, fees and tips, etc. Dates you left and returned for each trip and number of days spent on business. Destination or area of your travel (name of city, town, or other designation). Purpose: Business purpose for the expense or the business benefit gained or expected to be gained.

Relationship: N/A

Entertainment Cost of each separate expense. Incidental expenses such as taxis, telephones, etc., may be totaled on a daily basis. Date of entertainment. (Also see Business Purpose.) Name and address or location of place of entertainment. Type of entertainment if not otherwise apparent. (Also see Business Purpose.) Purpose: Business purpose for the expense or the business benefit gained or expected to be gained.
For entertainment, the nature of the business discussion or activity. If the entertainment was directly before or after a business discussion: the date, place, nature, and duration of the business discussion, and the identities of the persons who took part in both the business discussion and the entertainment activity.Relationship: Occupations or other information (such as names, titles, or other designations) about the recipients that shows their business relationship to you.
For entertainment, you must also prove that you or your employee was present if the entertainment was a business meal.
Gifts Cost of the gift. Date of the gift. Description of the gift.
Transportation Cost of each separate expense. For car expenses, the cost of the car and any improvements, the date you started using it for business, the mileage for each business use, and the total miles for the year. Date of the expense. For car expenses, the date of the use of the car. Your business destination. Purpose: Business purpose for the expense.

Relationship: N/A

 

How Long To Keep Records and Receipts

You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file the income tax return on which the deduction is claimed. A return filed early is considered filed on the due date.

 

IRS Publications for Reference:

  • Publication 535, Business Expenses
  • Publication 587, Business Use of Your Home
  • Publication 463, Travel, Entertainment, Gift, and Car Expenses

 

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