Is this a business or personal expense?

In our last post, we discussed how the difference between income on your tax return and income statements vary because of business expense deductions.

In this follow-up post, we’ll help you distinguish between what is a true business expenses and what may be a personal one.

As an entrepreneur, you may feel that most of your expenses have been incurred to benefit your business in some way.

However, due to the tax advantage of inflating the deductions against your trading income, the IRS insist that all expenses must meet the “ordinary and necessary” rule for them to be allowable.

At Nipren, our role as bookkeepers mean we get to see a whole host of varying business expenses. So, here is our quick-fire list of the expenses that can cause the most confusion.

Travel costs

Most entrepreneurs undertake a lot of travel as part of their role within their business. But surprisingly, not every journey you make will be deductible.

Allowable travel costs must be primarily for business and be away from your residence. This means the travel between your home and your office is not allowable but a journey between your office and a client’s is.

Any parking and tolls that you incur while on a business journey will also be allowable.

Food and Drink costs

Any meals that you buy for yourself, e.g. during your lunch break are not allowable unless you are on an out-of-town business trip.

However, any business meals that you have with a client are deductible. By business meals, the IRS mean that you need to have engaged in business discussions with your client, so a general catch up wouldn’t fall into this category.

Insurance costs

Any insurance that you take out with the intention of protecting your business is an allowable expense. This can include fire, property, malpractice, general liability and workers’ compensation.

Insurances that cover yourself, such as health or disability insurance are not allowed, even if you are involved in an industry that requires you to be in good health.

Use of Home costs

Expenses that have both a business and personal element can be hard to account for and working from home is a good example of this.

In these cases, it is better to record the actual costs but only claim the percentage that they are used for business. With the example of use of home, this would require you to calculate the square footage of your home and from this work out what percentage is used for business. So, if 10% of your home is used as your office, you could claim 10% of your rent, insurance and utilities against your business income.

What should you do if you are unsure?

We always recommend that our clients provide us with too much information, rather than not enough.

By providing us with all your expenses, we can advise whether we believe the expenses to be ordinary and necessary to your business. This will result in you being able to claim every deductible expense.

If paperwork is not supplied to us, then we cannot perform these checks and you may end up paying too much tax.

Contact us today if you would like Nipren to help you to organize your expenses and ensure all deductible expenses are claimed.


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