A business is allowed a deduction for all ordinary and necessary expenses that are incurred during a taxable year. For a small business in particular, these deductions can be important. Below is a list of some of the most common expenditures to track and the qualifying requirements that go along with them.
To deduct the expenses for the business use of your home, you must use a portion of your home “exclusively” and “regularly” for your business. To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. While the space generally does not need to be an entire room, the area should have clear boundaries that separate it as an identifiable workspace. For example, a shared space such as a table in your living room will not qualify because it is also used for recreational purposes. While there is no specific definition for what constitutes regular use, the home office should typically be used on a consistent and steady basis.
In addition, the home office must be either the “principal location of the business,” or a place where you “regularly” meet with customers or clients. Therefore, as long as you use the home office to conduct administrative or management activities, and you don’t make substantial use of a different fixed location to conduct operations, you will typically pass this test.
If you qualify for the home office deduction, you also will be eligible to deduct a portion of your utility bills and other home-related expenses, such as electricity, heat (gas), sewer, water, etc.
Travel expenses are the “ordinary” and “necessary” expenses that coincide with traveling away from home for your business. Ordinary expenses include any normal expenses that a business would naturally be expected to incur. Necessary expenses are those that are helpful and appropriate to satisfy the job requirements of your business. Examples of deductible business travel expenses include airfare, car rentals, internet fees, lodging, business meals, etc. Read more on deducting travel and transportation expenses in our related post, “The What and How-to’s of Deducting Travel, Meals & Entertainment Expenses.”
Office Supplies and Equipment
Office supplies are classified as tangible items that aid in the operation of your office activities. Examples of depletable supplies include paper, pens, staples, printer ink, etc.
Certain equipment, generally with a useful life of more than a year, must be capitalized and depreciated, meaning the cost is expensed over a period of time rather than in the year of purchase. Examples of eligible property include computers, office equipment such as printers, furniture, etc. To adequately track depreciable assets, your records should include a description of the property, date placed into service, cost of the property and percentage of time the property is used exclusively for business.
If you use your personal vehicle for business purposes, generally you can deduct business expenses for that vehicle. There are two common methods you can choose from for deductibility purposes. The standard mileage rate is the most preferred option because of its simplicity, and allows 53.5 cents per business mile for the 2017 tax year. To substantiate this deduction, you will need to maintain a mileage log. In accordance with the IRS, your report should include the dates, mileage, business destination and business purpose. In addition, you also must track the aggregate number of miles driven during the year for business, commuting and personal use. Fortunately, most smart phones now have apps that can track mileage expenses to help maintain comprehensive records. The actual expense rate method is typically more cumbersome and uses the actual costs related to the operation of the vehicle. Examples of expenses to track under this method include gas, oil, repairs, tires, insurance, etc.
Additional costs that could qualify as deductible expenses include, but are not limited to:
- Professional fees
To adequately track your expenses, you should maintain a comprehensive account book or diary log. You also should keep documentary evidence to support each element of an expense, such as receipts, canceled checks and bills. To be considered adequate, these records should provide the monetary amount, date, place and essential character of the expense. It is best practice to record the elements of an expense as soon as the activity occurs, rather than at a later date when it may be difficult to remember specific details. Each unique payment ordinarily is considered as a separate expense and should be recorded independently. For example, if you entertain a customer for a business dinner and then attend a theater performance afterwards, the two events would classify as separate expenses. To help differentiate your payments, it is usually a good idea to set up a separate checking account for the business. Lastly, plan on preserving historical records and receipts for the duration for which they can legally be requested by the IRS (generally a minimum of three years).
Maintaining an effective recordkeeping system is paramount when tracking expenses and qualifying for particular deductions. Substantiating data and complying with IRS regulations will help your small business be better prepared to file accurate financial statements and income tax returns.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.