As a business owner, you can deduct many of the expenses you incur for your business from your sales. This lowers your taxable profit, so you pay less tax. But not all expenses are considered deductible as business expenses. In this article, we clearly outline the rules governing the deduction of business expenses.
Mixed expenses: What does and does not fall under deduction of business expenses?
Business expenses are all the expenses necessary to run your business. Think of procurement costs, office expenses, insurance, registration fees with the Chamber of Commerce and start-up costs when starting your business. But if an expense is both business and personal in nature, things get more complicated. In that case, the expenses are only partially deductible business expenses. Say you use a cell phone for both business and personal use, say 50% business and 50% personal, then half of the purchase and subscription costs are considered deductible as business expenses. The same percentage applies when reclaiming the VAT on these costs.
Non-deductible expenses
There are expenses that are not directly related to your business, such as groceries, clothing, or the rent or mortgage interest on your home. These are considered private expenses and therefore you cannot deduct them as business expenses. In addition, there are expenses that are business expenses but are still not deductible. These include traffic fines or tax penalties for late returns. General literature and personal care expenses also fall outside the category of deductible business expenses. Representation expenses, such as business gifts or dinner with a client, are examples of expenses that are partly business, but whose deductibility is limited. Thus, you can deduct only part of these expenses from your profits.
Tax authorities and deduction of business expenses
The IRS often leaves it up to you what expenses you incur for your business because you know best what is necessary for your business. Still, certain expenses may be disallowed if they are too far out of proportion to the benefit to your business. For example, a doctor once bought a small plane to fly to conferences. In that case, the Internal Revenue Service ruled that this did not fall within deductible business expenses. There is no handbook indicating exactly which expenses are or are not deductible as business expenses. Therefore, it is always important to look critically at the expenses you incur and ask yourself if they are really necessary for your business.
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If you are unsure about which business expenses are deductible or about specific expenses, our specialists are available to review your situation and help you along the way. Simply schedule a no-obligation appointment, and together we will provide the best solution that fits your business.
