What can you legally write off as a business expense? You may think that the money you spent is for your business. However, IRS may consider it differently. In this topic, we are trying to discuss and give an idea that what are the tax w-offs legally allowed and most importantly how it should be presented in your favor.
Deducting business expenses
This could vary for a small business or for a large corporation or other legal entity. In the case of a small business, there are certain expenses that IRS will allow you to w-off. For example “home office expenses.”
Small business tax-deductible expenses?
As defined by IRS, your business may qualify as a small business:
For new businesses that are in existence for less than three years, they can use average yearly gross receipts since they came into existence. If you were operating as a different entity before or new business include that entity’s gross receipts as well. Whether you are sole-proprietor, Partnership, or incorporated this applies in all situations.
Let us look into a few examples. You are in the business of a real estate broker. You bought your cell phone for your business and it is your tax-deductible expense. However, you bought a new suit or dress to meet with your clients and it is your personal expense and hence not tax-deductible. Furthermore, you met with your client for lunch and paid for the food and beverages. The payment you made for food and beverages is categorized under “business meals” and only 50% of the expense is tax-deductible.
You pay taxes on your net businesses income, which is calculated by deducting your business expenses from the revenue. You may think of many operating expenses but all may not be tax-deductible and for certain for some deductions conditions may apply.
IRS considers your tax-deductible expenses based on both “ordinary and necessary” for your business and reasonable a reasonable amount. An inappropriate claim of tax-deductible expenses may trigger an audit by IRS. If your expenses are found non-deductible, you will be subject to tax, maybe additional taxes payable and interest, and penalties on taxes payable. Moreover, you will be concerned about spending your time with IRS in providing documents and explanations.
Herein below is the checklist for you from many of those tax-deductible expenses that may apply in your situation. The list is not comprehensive. The expenses must have both the elements of what is “ordinary and necessary”. You may please discuss these items with a tax professional, your CPA. To learn a little more detail about the below-mentioned 44. expenses, please visit our blog, “44-Tax deductible expenses.”
As defined by IRS your tax-deductible expense is considered as “ordinary” when these expenses are common and accepted in your industry. Your tax-deductible expenses are considered “necessary” when these expenses are helpful and appropriate for your business. Expenses that are necessary for your business need not be essential or vital for your business. You need to figure out or take the help of your CPA to claim your tax-deductible expenses and find out what are your costs of goods and services sold, other business expenses, capital expenses, and personal expenses. Your costs of goods sold include your inventory. Valuation of your business inventory is another important task that involves IRS guidelines and generally accepted accounting principles.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.