Deductible Business Expenses

The top question on most business owners' minds is "What can I deduct?" (sometimes

phrased as "What can I get away with deducting?"). Here is an explanation of deductible

expenses, excerpted from Chapter 20 of my book Minding Her Own Business: the Self-

Employed Woman's Essential Guide to Taxes and Recordkeeping:

The key to reducing your net profit (and thus, your tax liability) is not to have more expenses, but rather to make existing expenses legitimately tax deductible. Get into the mind-set of being a self-employed person. Always ask yourself, “Is there any way I could deduct this expense as a business expense?” or “If I change the time or the way I do this, can I make this expense deductible?” If yes, get a receipt, keep canceled checks, and follow the other recordkeeping suggestions presented in Section 2 of this book.

Deductible expenses are those that are ordinary and necessary. Ordinary means that someone else in the same line of work would have a similar expense. Necessary means that in order to operate your business it was necessary for you to have this expense. In an audit, the IRS may not ask you these specific questions, but this is what the auditor is looking at when reviewing the expenses you deducted:

•  Is the expense helpful to your pursuit of profit?

•  Is the expense needed in order for you to make money?

•  •  Is the expense appropriate to your pursuit of business?

•  Would you have had this expense if you didn’t have the business?

In other words, in an audit, the IRS is not only interested in seeing that you have backup materials (e.g., canceled checks and receipts) for expenses you claim, but also that there is a legitimate business reason for claiming each expense.

Click here to download a list of deductible business expenses (requires Acrobat Reader)
 

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