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In some cases the IRS is very specific and detailed in describing what you can and cannot deduct, however, most of the items fall under their Ordinary and Necessary rule.
An ordinary expense is an item that is common and accepted in your business.
A necessary expense is a purchase that is helpful and appropriate to your business but doesn't need to be crucial to your business.
Keep in mind what is ordinary and necessary for one business isn't necessarily ordinary and necessary for another. |
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| Top 10 Forgotten Deductions |
| 1) |
Mileage. Traveling to a client's place of business, picking up office supplies, and other business related miles can be deducted at a rate of 36 cents per mile in 2003.
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| 2) |
Telephone. Any phone line dedicated to your business may be deducted including cell phones, pagers and fax lines.
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| 3) |
Equipment. You can deduct up to $24,000 in equipment in the same year you purchase the items using a Section 179 deduction. This is takes the place of depreciation. |
| 4) |
Travel. 50 percent of your meal and entertainment expenses while on vacation can be deducted if the expense is directly related to a business activity such as meeting with a client or prospect. This must be heavily documented to withstand an audit.
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| 5) |
Subscriptions and Dues. Magazine subscriptions for publications relating to your business are deductible. Dues to business organizations are also deductible.
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| 6) |
Books and software. If the topic or use is directly related to your business these expenses can be deducted. |
| 7) |
Furniture. Reasonable expenses for furniture are deductible. Spending $10,000 on an antique desk isn't considered reasonable unless you are a high-end interior designer.
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| 8) |
Theft. Items stolen from your business can be deducted as can loss from damage caused by Acts of God. This gets a bit tricky but it's worth looking into if it happens.
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| 9) |
Education. You can deduct up to $5000 a year on continuing education if it is directly related to your business. This includes college level classes, seminars and tele-seminars. |
| 10) |
Child Care. Your business can reimburse you up to $5000 a year for child-care. The business can then deduct the expense. |
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| Top 10 Non-Deductions Expenses |
| 1) |
Mileage. Miles traveled commuting to your office isn't deductible. Likewise, miles traveled for personal errands while also traveling for business purposes can't be deducted. For example, if you go to the post office to mail business papers, stop at the grocery store for dinner, drop by the office supply store then return to the office, the miles from the post office to the grocery store are not deductible.
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| 2) |
Telephone. The charges for the main phone line coming into your home (if you work from home) cannot be deducted. Any long distance charges related to your business can be, however.
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| 3) |
Equipment. You cannot use the Section 179 deduction if you have claimed depreciation on a piece of equipment in prior years. The depreciation must continue for that piece of equipment. |
| 4) |
Dues. No deduction is allowed for club memberships such as athletic, airline, hotel or other recreational clubs even if the membership is for business purposes.
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| 5) |
Clothing. Suits or dress clothes are not deductible. The exception to this is having a job that requires a mandatory uniform such as a Police Officer or UPS driver. Regular street clothes masquerading as a uniform isn't deductible. |
| 6) |
Traffic Tickets. Even if the ticket is incurred while on a business trip or traveling for business purposing the ticket is not deductible. The same goes for parking tickets. Both fall under illegal activities |
| 7) |
Tax Penalties. Any penalties and interest you pay for submitting your taxes late are not deductible |
| 8) |
Education. Seminars or classes taken that are not directly related to your business, change your career path or help you meet the minimum requirements for a job are not deductible.
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| 9) |
Gifts. Items given to clients or customers over $25 in value. You can deduct the first $25 but not any amount over that.
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| 10) |
Prepaid Liabilities. If you are on a cash basis you cannot deduct expenses years in advance. For example, if you pay for a three-year subscription to a magazine you can only deduct one year of the subscription cost this year, one next year and the final amount in year three |
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| Be ready to explain your expenses to an auditor. If you can't explain it without laughing about it don't deduct it. Make sure your expenses are necessary to your business and ordinary in the course of your operations.
If you would like additional information about deductions or have questions, please email or call us (406-216-2224). We would be delighted to help you |
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