Tax-Deductible or Not? Ask Your Expert
Thoughts from our experts
As business owners prepare to file tax returns, many find they have to reconstruct some of last year’s expenses. This is usually a result of paying business expenditures by personal means instead of through a checking account or credit card used exclusively for business. Delays and frustration result when there isn’t sufficient information, or you can’t remember the details required for some write-off claims.
By hiring an accounting professional, you can be sure every expense deduction your business is entitled to will be captured in a timely manner. Our CPA's are both experts in cloud accounting software and the Internal Revenue code. Our Bookkeeping experts know how to record expenses regardless of the payment method. And they understand the conditions that make certain types of expenses tax-deductible.
How having an accounting system helps
With a double-entry bookkeeping system, every transaction records a balanced combination of debits and credits. Unlike spreadsheet entries, double-entry accounting will debit an expense category and simultaneously record the offsetting credit to an account that shows how the expense was paid.
Using accounting software for do-it-yourself bookkeeping is not a complete solution because it leaves you with the burden of learning about account categories and tax classifications. But when a skilled bookkeeper sees checking account outflow or credit card use, he or she will immediately seek information about the balancing expenditures. Even when your personal funds are spent for business purposes, your accounting professional will know the account that offsets the expenditure.
Types of Expenses & Special Rules
A deductible business expense must be necessary and normal for your type of enterprise; personal expenses are never tax-deductible just because they’re paid by your business or have a loose connection to business operations. These types of transactions are considered owner draws.
For example, an accounting professional knows that business owners are prohibited from claiming tax deductions for wardrobe items or personal grooming. Expenditures such as haircuts and gym memberships are strictly personal, regardless of the intangible benefit derived from maintaining a good appearance.
Businesses also cannot deduct costs for the owner’s residence. However, if you meet home office requirements, the business may reimburse you for a percentage of your home expenses. This is based on the portion of your home used regularly and exclusively for business; in most cases, the home office space also must be the primary business location.
There are special tax rules that allow deductions for business education and travel. General business education is deductible, but seminars and conferences must maintain or improve skills required in your current line of business.
Business travel is generally associated with overnight stays away from home. A deduction for all the travel cost is allowed when the primary purpose of the trip is to conduct business. When the trip is primarily for pleasure, only expenses directly related to business are tax-deductible. In this case, deductions for transportation and lodging costs are based on the percentage of days during the trip that business is conducted.
Obviously, caution must be exercised when claiming certain tax deductions. Your accounting professional is a valuable source of knowledge about what can – and can’t – be claimed.