One of the questions I’m sure to get from a new business owner is “What’s deductible?” That’s a hard one because the answer is really, “It depends.”
The IRS needs to see that an expense is ordinary and necessary to the production of income. Of course, that gets hard to determine because what’s ordinary and necessary to your business might not be for mine. For example, I had a client who has a physical therapist who specialized in treating children. She had to test a lot of toys out to determine how they could be used. So she had a room in her office (which was built on her property) specifically for toys. Her kids loved it! And it was all tax deductible.
I don’t think I could get away with that for my tax practice. Although I think sometimes my clients would really rather sit and play with some toys then talk about taxes. There are certainly days when I know I would!
Two types of expenses keep coming up again and again. They are the most misunderstood, I think. That’s the meals expense and the home office deduction.
The meals expense is deductible when there is a business purpose associated with the expense. So if you and a client or prospect go to lunch and you pay, you get a 50% deduction. It gets a little trickier if it’s a family business. Can you really deduct every single meal, because I know with our family business we talk business in some shape or form at every meal? Answer: No. I think you really could make an argument that every meal is business if everyone works in the business. But, I don’t think it’s reasonable.
Remember too that if you take a meal for the benefit of the employer at the place of employment, it’s 100% deductible. So if you grab a sandwich and eat it at your desk, it might not be good for your digestion, but you do get a 100% deduction.
And the second deduction is the one I’m certain to have a discussion about at least once a week. It’s the home office. The home office is a deduction you take for a portion of your home that is used exclusively and regularly for business. Exclusive means it’s not a corner of the dining room table – it’s a separate room. Regularly means you do some kind of business there. It doesn’t mean that it’s your only office. In fact, many of my clients have a home office plus another place.
I’ve blogged about the home office deduction a lot through this site, yet it still remains a mystery. If you’ve got a space that is used exclusively and regularly for business – it’s a deduction! Take it.
More than anything, though, in the first few years of your business, you need to learn to look at every expense differently. Is this a business deduction? If so, what proof do I need to keep to demonstrate that? How do I account for it and how do I keep records that substantiate the legitimately of it?
Those are the questions that put money in your pocket.