The difference between business and personal expense deductions

When we do your bookkeeping, we record all your incomes and expenses relating to your business to produce your financial statements.  The financial statements are composed of the Profit and Loss, the Balance Sheet and the Cash Flow statements.

The financial statements are created to give you an insight on how well or not your business is performing and growing.

Very often we noticed that entrepreneurs do not understand why the income on their tax return is not the same as the one on their financial statements.

Essentially, these differences are caused by business deductions. Some business deductions are 100% deductible and some others are not. For tax purposes, the non-deductible portion of the deductions which are only partial will be added back to your net income to produce your taxable income.

Example

During the year, for bank reconciliation purpose, your bookkeeper had to record all the expenses you made with your business debit card.

However some expenses might not relate to your business, therefore these expenses should be correctly booked in a specified account to be easily identifiable so they are not taken into consideration to reduce your taxable income.

Secondly, some business deductions are not 100% deductible, such as meals and entertainment, which is in most circumstances is only 50% deductible. The other 50% will be added back to your taxable income.

See our illustration here below:

 

For more information, see Publication 535, Business Expenses and Publication 463, Travel, Entertainment, Gift, and Car Expenses.

See related post: Is this a business or personal expense?

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