Is It Deductible ?

• What business expenses can I deduct on my tax return?
• Where do I take the deduction for…(fill in the blank)?
• What records do I need to prove the deduction?

Those are the most popular questions I get from small business owners this time of year.

Starting today and continuing through the end of this year’s filing season, I’ll be answering those questions in a series of posts. If you have a specific question you’d like me to answer, please post it in the comment section here or email it to me.

Let’s start today with the basic requirements for an expense to be deductible on your business tax return.  Here’s what the IRS says.

• The expense must be ordinary
• The expense must be necessary
• The expense must be reasonable in amount
• The expense must be substantiated

Ordinary means that the expense is one that is common and accepted in your field of business, trade, or profession. Necessary means that the expense is helpful and appropriate for your business, but it doesn’t have to be required.

Reasonable means considering the facts and circumstances of your particular situation.

Not much help, you say?  Sounds like it’s all a judgment call?  Yes, in many ways it is.  I guess that’s why the deductibility of business expenses is one of the 10 most litigated tax issues.   I don’t say this to scare you, but to inform.

Did you know that tax deductions are actually a matter of “legislative grace?” That means you have to be able to point to a relevant statute and show that your expenditure comes within its terms.

This is one reason why I recommend you hire a professional tax preparer to do your business return.  The more you learn and understand about taxes, the more beneficial that relationship will be.

Next time I’ll talk about where to take your business deductions.