The general IRS definition of a deductible business expense is “ordinary and necessary”. When this rule is applied to various expenses, it is usually fairly easy to determine if an expense is deductible. Some areas are a little more difficult, though. Here are a few tips:
- Do you use your personal cell phone for business? With proper records, you can deduct the portion of calls that are business-related, while personal use is not considered “necessary”.
- Traveling with your spouse? If you take your spouse along on a business trip, his or her costs for the trip are not deductible unless the spouse is also involved in the business (which is a good reason to hire your spouse as your bookkeeper). On the other hand, your accommodations are deductible for the first person, which is generally the lion’s share of the cost. So if you stay in a $350/night room that charges $20 for every extra person, only the $20 is personal rather than $185 [(350+20)/2].
- Meals and entertainment can be a sticky area. Eating lunch on the job is not deductible because it is assumed you’ll have to eat regardless of where you are. But eating lunch with an associate is a gray area. If you are having a casual lunch with a buddy, not deductible. But if you schedule a meal to meet and discuss business, you can deduct 50% of the cost. The IRS does not require you to keep a receipt for less than $75, but you still must be able to document the purpose, what was discussed, date, and people at the meeting. Best to simply keep all receipts and jot this information on the back.
- How about a big meal – say you treat your office to lunch or hold a Christmas party at a nice restaurant? Good news – if you include all employees at your practice (even if they don’t all attend), you can deduct 100% of the meal as a business expense rather than a measly 50%. We typically recommend that clients have 2 separate accounts on their books: “Meals & Entertainment – 100%” and “M&E – 50%”.
- What about car expenses? You cannot deduct commuting, but you can deduct miles driven beyond your daily commute. Since most people take a cents-per-mile deduction (as opposed to actual expenses), here’s something you may not know: in addition to your mileage, you can also take a prorated portion of interest on your car loan and property taxes on your car, along with the actual cost of parking and tolls. Just keep good records – in the event of an audit, you can be sure that you’ll have to pull out your mileage log!
If you pay for these expenses personally rather than through the business, you need to use something referred to as an “accountable plan” for your business. You turn in a record of your expenses, the business cuts you a check. The business gets the deduction and you are reimbursed but pay no taxes on the check you receive.