Tame Taxes with Smart Business Expense Deductions
Savvy Saving: Dos and Don'ts for Maximizing Business Expense Deductions
As tax season approaches, businesses become keen on minimizing their tax burden. One prominent method involves strategic deductions for business expenses. However, not every expense qualifies for this tax-saving opportunity.
Deductible Expenses
The IRS considers an expense deductible if it’s BOTH ordinary (common in your industry) and necessary (helpful and appropriate, though not essential). For instance, paper and ink for a printing company qualify as ordinary and necessary. Remember, just because an expense fits these criteria doesn’t guarantee immediate deduction. You might need to spread the deduction over multiple years through depreciation or amortization.
Personal vs. Business Expenses
Distinguishing personal expenses from business expenses is crucial. While purely personal expenses aren’t deductible, there are expenses that are both personal and business in nature such as phone, internet, or vehicle expenses. You can allocate those and deduct the business portion of those expenses. Remember to document the business portion meticulously.
Traveling for Business
Expenses incurred during business trips away from your “tax home” or main workplace are generally deductible. You’re considered “away from home” if the trip requires more than an ordinary day’s work and necessitates overnight stay. Similarly, convention expenses are deductible if relevant to your business, with specific rules applying to conventions outside North America. However, commuting expenses remain non-deductible for employees.
Entertainment and Food & Beverages
Entertainment expenses used to be partially deductible, but the TCJA changed this. Currently, business deductions for entertainment, amusement, or recreation are prohibited, including expenses for related facilities and club memberships. Food and beverage deductions also saw modifications. After the temporary 100% deduction ended in 2022, you can now deduct 50% of non-lavish food and beverage costs incurred when you or an employee are present, regardless of who you’re treating. Remember, proper documentation like itemized receipts is key. Notably, food and beverages at non-deductible entertainment activities might still be 50% deductible if purchased and priced separately.
Client Gifting
Business gifts generally have a $25 deduction limit per recipient annually. Excluded from this limit are incidental costs like engraving and gifts costing $4 or less with your business name permanently engraved and that are distributed regularly such as pens, bags, notebooks, etc.
Vehicle Expenses
Vehicle purchase prices require capitalization and cost recovery through annual depreciation deductions. However, certain vehicles might qualify for immediate expensing under specific tax code sections. Routine maintenance and repairs are generally deductible in the year incurred.
Seek Professional Guidance
Navigating the intricacies of business expense deductions can be complex. Contact a Brady Ware tax advisor to ensure you maximize your deductions while adhering to IRS regulations. By understanding these dos and don’ts, you can make informed decisions and optimize your business’s tax savings.
Questions?
Loraní is a tax specialist in federal, state, and local taxation. Her goal is to provide clear communication and guidance with her clients on tax consequences and best paths of action.