April 04, 2020

Deductible Expenses

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Deductible Expenses

Expenses have a direct effect on how much tax you end up paying, so you want to track all company’s eligible expenses. If there is not adequate support from business records, you cannot deduct even allowable tax deductions. 

For an expense to be eligible for the deduction, it needs to be necessary and normal for business. A necessary expense means that it is appropriate and valuable for your business. An ordinary expense is the one that is commonly accepted in your specific industry.

Equipment purchases

Businesses are allowed to deduct 100% of the purchase (or lease) price of qualifying equipment and/or software purchased or financed during the tax year. However, keep in mind that this equipment should be used only for your business to deduct the full price. Otherwise, only a portion that you can prove was used by the business can be used for deduction. 

Since the equipment is a long-term asset, the cost is depreciated over time. This depreciation is deducted in increments over the equipment’s useful life. If the business makes regular equipment purchases, this price can be deducted immediately using an accelerated depreciation method. However, since the yearly limit is $18,000, it might make sense to use the straight-line depreciation method to spread the deduction over a longer period.

Business expenses

The rule of thumb is if the expense helps the business to create an income, then you are likely allowed to claim it. Marketing expenses, office supplies, postage, business automobile mileage, home office space, rent, lunch meetings, and most employer contributions are all great examples of appropriate expense deductions. 

Auto expenses

There are two methods to claim the business use of your car. One of the methods is the mileage method. Under this method, the IRS gives you a predetermined rate to deduct for every mile driven for the business. This rate includes gas, oil, repairs, depreciation on the vehicle, and everything except tolls and parking. The last ones can be added to the predetermined rate. 

The second method is the actual method. Under the actual method, you add up all expenses related to automobiles and only deduct a business portion. Common car-related expenses include routine car maintenance, vehicle registration fees, insurance, car loan interest, toll and parking fees, depreciation, and gas. 

Meal and entertainment expenses

This is an expense that many people have a lot of questions about. Business owners can claim entertainment and meal expenses, which were necessary to earn income. In other words, it has to be directly related to your business, which ensures that businesses do not exploit this form of deduction. 

The 2017 tax reform denies the deduction for business entertainment: events, athletic events, recreation, and amusement, etc. Under the tax law, entertainment is meals with clients or prospects to engage in business discussions that you have to be engaged in. Generally, an amount you can claim for these expenses is 50%. Documentation of business meals should include to who, what, when, where, and that a substantial business discussion has taken place during the meal.

Travel expenses

Travel expenses are an amazing opportunity to take advantage of some serious tax savings for the business. To write off travel expense, you need a business purpose. Airfare, hotel, rental car, rental car gas, Uber, Airbnb, valet, and toll are just a few travel expenses you might encounter. You can deduct 100% of these expenses if you are going to: meet a customer, client, a vendor, or an affiliate, have a Board Meeting, visit a rental property, or attend a workshop.

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Author: Charles Lutwidge

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