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In some cases the IRS is very specific and detailed in
describing what you can and cannot deduct, however, most of the items fall
under their Ordinary and Necessary rule.
An ordinary expense is an item that is common and accepted in
your business.
A necessary expense is a purchase that is helpful and
appropriate to your business but doesn’t need to be crucial to your
business.
Keep in mind what is ordinary and necessary for one business
isn’t necessarily ordinary and necessary for another.
Top 10 Forgotten Deductions
- Mileage – Traveling to a client’s place of
business, picking up office supplies, and other business related miles
can be deducted at a rate of 36 cents per mile in 2003.
- Telephone – Any phone line dedicated to your
business may be deducted including cell phones, pagers and fax lines.
- Equipment – You can deduct up to $25,000 (limit
for 2003) in equipment in the same year you purchase the items using a
Section 179 deduction. This
is takes the place of depreciation.
- Travel – 50 percent of your meal and
entertainment expenses while on vacation can be deducted if the
expense is directly related to a business activity such as meeting
with a client or prospect. This
must be heavily documented to withstand an audit.
- Subscriptions and Dues – Magazine subscriptions
for publications relating to your business are deductible.
Dues to business organizations are also deductible.
- Books and software – If the topic or use is
directly related to your business these expenses can be deducted.
- Furniture – Reasonable expenses for furniture
are deductible. Spending
$10,000 on an antique desk isn’t considered reasonable unless you
are a high-end interior designer.
- Theft – Items stolen from your business can be
deducted as can loss from damage caused by Acts of God.
This gets a bit tricky but it’s worth looking into if it
happens.
- Education – You can deduct up to $5000 a year
on continuing education if it is directly related to your business.
This includes college level classes, seminars and tele-seminars.
- Child Care – Your business can reimburse you up
to $5000 a year for child-care. The
business can then deduct the expense.
Top 10 Non-Deductible Expenses
1.
Mileage – Miles traveled commuting to your office isn’t
deductible. Likewise, miles
traveled for personal errands while also traveling for business purposes
can’t be deducted. For
example, if you go to the post office to mail business papers, stop at the
grocery store for dinner, drop by the office supply store then return to
the office, the miles from the post office to the grocery store are not
deductible.
2.
Telephone – The charges for the main phone line coming into your
home (if you work from home) cannot be deducted.
Any long distance charges related to your business can be, however.
3.
Equipment – You cannot use the Section 179 deduction if you have
claimed depreciation on a piece of equipment in prior years.
The depreciation must continue for that piece of equipment.
4.
Dues – No deduction is allowed for club memberships such as
athletic, airline, hotel or other recreational clubs even if the
membership is for business purposes.
5.
Clothing - Suits or
dress clothes are not deductible. The
exception to this is having a job that requires a mandatory uniform such
as a Police Officer or UPS driver. Regular
street clothes masquerading as a uniform isn’t deductible.
6.
Traffic Tickets – Even if the ticket is incurred while on a
business trip or traveling for business purposing the ticket is not
deductible. The same goes for parking tickets. Both fall under illegal activities.
7.
Tax Penalties – Any penalties and interest you pay for submitting
your taxes late are not deductible.
8.
Education – Seminars or classes taken that are not directly
related to your business, change your career path or help you meet the
minimum requirements for a job are not deductible.
9.
Gifts – Items given to clients or customers over $25 in value.
You can deduct the first $25 but not any amount over that.
10.
Prepaid Liabilities – If you are on a cash basis you cannot
deduct expenses years in advance. For
example, if you pay for a three-year subscription to a magazine you can
only deduct one year of the subscription cost this year, one next year and
the final amount in year three.
Be ready to explain your expenses to an auditor.
If you can’t explain it without laughing about it don’t deduct
it. Make
sure your expenses are necessary to your business and ordinary in the
course of your operations.
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Suzette Flemming is the CEO / CFO of Flemming Business
Services. Providing financial
direction to businesses since 1994. Learn
how to save money and increase your bottom line by subscribing to our free
newsletter – Make the Most of Your Money – at www.FlemmingBusinessServices.com
or send an email to newsletter@flemmingbusinessservices.com
or give us a call with questions at (425) 432-5870.
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