5 Common Mistakes With Expense Deductions
An expense becomes deductible for your business when you can prove it is ordinary and necessary for income production. That is unless it specifically goes against the tax code. Such as number two below. Another exception is if it’s illegal.
Don’t forget, you must keep receipts for any purchase $75 or more. In an audit, if you can’t prove the actual purchase you can lose the deduction.
1. Meals
We all love a good gourmet coffee and pastry at times, but chances are it’s not deductible. For a meal to be deductible, it must include at least one other person and it must have a business purpose. If you go through a drive-through on your way to the office, don’t even think about trying to deduct it. However, if you take a client to lunch to discuss their account, it could be deductible up to the 50% maximum allowed for meals meeting the IRS definition. In 2021 & 2022, if those same meals are purchased from a restaurant they are deductible at 100%. (There are exceptions to this rule if the meal is purchased during a business trip.)
2. Entertainment
Entertaining clients at sporting events, concerts, or other venues can help strengthen business relationships, but these days it will also negatively affect your bottom line. Beginning in 2018, entertainment, which once was deductible at 50%, is no longer deductible at all. So, you’ll have to brush up on your golf game on your own dime.
3. Clothes
That tailored suit you bought to photograph the wedding or the tennis shoes you wear while seeing patients are likely not deductible. For an article of clothing to be deductible it must be required by the employer and not adaptable to general public wear. For example, scrubs, special work boots, safety gloves, and goggles are deductible expenses, if they meet the IRS definition of being ordinary and necessary for the job. That dress you bought for your speaking engagement, likely is not.
4. Personal Grooming
Haircuts, manicures, massages are likely not deductible for you. Looking good might help you get new clients but is not an ordinary and necessary expense for most businesses. So, don’t even try to deduct that weekly massage that helps keep you sane! And unless you’re a hand model, think twice about expensing your manicure.
5. Gas/Fuel
Fuel for your personal vehicle is likely not deductible. Chances are if you are using your personal vehicle for business you are using the mileage deduction method on your tax return. When using this deduction, vehicle expenses are not deductible. (However, fuel is deductible with the ‘actual expense’ method.) On a side note, if you aren’t tracking and deducting your mileage, you could be losing out on a big deduction!
There are more types of expenses that aren’t deductible, but these are the most common mistakes I see with small business owners. I know the goal, especially before tax time, is to reduce income by as much as possible using expenses but be sure your method will pass an audit. And before you say the chances of YOU being audited are slim to none, think again. An income tax audit is not the only type of audit. Once you are on one state or federal agency radar you become fair game to other agencies. (Think payroll tax, sales tax, etc.)
Keep in mind, all expenses you deduct you must be able to explain how they are ordinary and necessary for income production for your business. Some of these will be different by industry and business model. Don’t immediately eliminate an expense for deduction without thinking through if it’s necessary for your business model.
~ Brandon & Christi are successful business owners who enjoy traveling and making a mess in the kitchen with their two daughters.
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The article is for informational purposes only and should not be construed as business, accounting, tax, or legal advice. Details are subject to change without notice.
Each business’s tax situation is different, so be sure to consult with your tax professional on your specific tax plan.
Copyright © 2019-2020, Brandon & Christi Rains, Rains Group LLC DBA The Sensible Business Owner, ALL RIGHTS RESERVED
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That’s a great explanation. Thank you!
Thanks Theresia! I am glad it was helpful. – Christi
As I am prepping for tax season this is a great refresher! Thanks for sharing!
Hi Nicole, I am glad it was helpful! Good luck with your taxes. – Christi
I used to be able to deduct my business wardrobe purchases back in the day. It helped so it sucks I can’t now. I didn’t know that the cost of entertaining clients was no longer deductible. I bet that really affected a lot of peoples sales tactics! Thanks for sharing these!
Hi Anna, Yes, the change in entertainment deductions, beginning in tax year 2018, sure was a doozy. I am glad you enjoyed the article. ~ Christi
I can’t believe people are no longer allowed to write up entertainment spending! Thanks for including it in your list.
Hi Ola, I agree, it surprises many! You’re welcome! ~ Christi