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Business Deductions

Expenses can be deducted only if they are ordinary and necessary to the operation of the business.

More specifically, business expenses are deductible if they are reasonable costs incurred only because of the business activities and are expenses that would not have been incurred otherwise.  The cost of acquisition and use of items of a personal nature that are only occasionally used in business activities must be prorated according to well-maintained records of actual business use vs. total use or may not be deducted at all.  Certain expenses or activities require exclusive business use to be applicable.

A list of common deductible expenses follows.  It is not all-inclusive.  Other expenses necessary to operate businesses or expenses unique to a specific business may also be deductible if they are ordinary, reasonable and necessary for your business to business activities.  In addition to the direct cost of materials and supplies sold or exchanged in the operation of the business, other examples of commonly incurred business deductions are:

  • Advertising and promotion, including contributions that result in publicity for the business.
  • Accounting service fees.
  • Auto and truck expenses, calculated using one of the following elected methods:
    • Mileage.  The mileage rate published annually by the IRS [$.565 per mile for 2013, $.56 per mile for 2014] applied to all documented vehicle miles associated with business activity [e.g. sales calls, service calls, attendance at business meetings, pick-up and delivery of supplies or product or documents or deliverables, and business errands such as going to the bank or the post office], or
    • Actual.  The business-use percentage of the actual documented business miles for which the vehicle was used divided by the total miles of the vehicle, measured annually, times the total cost of all expenses incurred to operate the vehicle during the same reporting period [e.g. gasoline, oil, insurance, repairs, tires, lease payments, finance charges, depreciation, etc.]
  • Bank service charges and fees.
  • Bookkeeping fees and costs.
  • Commissions, whether paid to outside sales persons or to employees.
  • Computer processing costs for processing fees, hardware costs, software fees, supplies, maintenance and repairs.
  • Consultation services.
  • Credit card annual fees for cards used in the business.  If the card is used partly for business and partly for personal expenses, the fee must be pro-rated accordingly to business vs personal usage.
  • Depreciation on land improvements, buildings, leasehold improvements, furniture, fixtures, equipment and vehicles employed in the business.  Under a temporary revision of Section 179 of the Internal Revenue Code (IRC), up to $500,000 worth of new tangible property acquisitions can be depreciated in full in the year of acquisition for 2013 but only $25,000 for 2014.  Listed property, such as vehicles, must have written records of business use maintained.  In addition, maximum amounts of depreciation apply to most vehicles.  Bonus depreciation of 50% is available for 2013 for both new and used tangible property acquisitions but this provision is set to expire for 2014 as of this writing.
  • Dues and subscriptions.
  • Education, including seminars and conferences, to increase knowledge and skills necessary in the conduct of the business.  A business deduction may not be taken for the cost of education that provides minimum qualification requirements for a new line of business, career or occupation.
  • Employee pension and benefit programs.
  • Expense reimbursements to employees.
  • Company events [100% deductible even when involving meals and entertainment].   [e.g. picnics, holiday parties] and employee meals for the convenience of the employer [e.g. meetings for training, planning]
  • Finance charges on business vendor relationships, including equipment and vehicle purchases.
  • Fringe benefits for employees.
  • Furniture and décor required for business facilities.
  • Gifts to business associates or clients [up to $25 per person per year is deductible.
  • Home office expenses that qualify used regularly and exclusively for business purposes, using one of two alternative methods.
    • Allowance.  Use of a standard rate of $5 per square foot per year of home office space [not to exceed 300 square feet], or
    • Actual.  Use the business percentage of all related expenses [insurance, real estate tax, mortgage interest, rent, maintenance, utilities, etc.].  The business percentage is based on the size of the office relative to the total square footage of the home.
  • Insurance [e.g. fire, liability, malpractice, business interruption, dishonesty bond, workers’ compensation].
  • Interest on business credit cards.  As with credit card fees, interest on a card used for both personal and business expenses must be pro-rated.  Documentation is required to prove the allocation in such pro-rated situations.
  • Interest on business loans [e.g. mortgage, equipment acquisition, working capital, line of credit]
  • Internet and email expenses used for business.
  • Legal and professional fees.
  • Licenses and other government fees.
  • Magazines and books required for the business.  General circulation publications, including the local newspapers are usually not deductible.
  • Maintenance and repairs on land, buildings, furniture, fixtures and equipment used exclusively for business purposes.
  • Meals and entertainment required for business purposes [50% deductible].  A business discussion must take place immediately before, during or after the meal or entertainment event.  Documentation must be maintained detailing who participated in the event, what the business relationship is of the person entertained, when the event occurred, where the event occurred, why it was necessary, how the business discussion pertained to necessary business activities, and how much the expense cost.
  • Office supplies.
  • Pager and answering services.
  • Parking and tolls.
  • Payroll taxes incurred by the employer [not the employees’ share].
  • Postage, delivery and freight costs.
  • Printing, copying, and fax charges.
  • Promotion costs.
  • Reimbursements when the item of original expenditure meets the ordinary and necessary criteria.
  • Rent of equipment and facilities.
  • Salaries paid to employees.
  • Sales expenses.
  • Small tools.
  • Subcontractors and consultants.
  • Taxes.   [e.g. state and local gross profits tax, business privilege tax, mercantile tax, personal property taxes on business assets, real estate taxes, and sales and use tax on taxable materials, supplies and services].  Sales tax on furniture, fixtures and equipment must be included in the price of the equipment purchased, subject to depreciation limitations.
  • Tax preparation service fees and costs.
  • Telephone.  Long-distance business calls made from home are fully deductible regardless of the applicability of an office-in-home deduction.  Monthly service charges for telephones installed in non-business facilities are deductible only when there is more than one phone line and the service for which the deduction is taken is used for business.
  • Travel for business, including costs to go to seminars and conferences.  Deductible travel costs include hotels, airfare, taxis, car rentals, tips and other related costs.  Unlike meals and entertainment, travel expenses are 100% deductible and the travel costs should be segregated from the costs for meals and entertainment, even when related to attendance at the same event to preserve the 100% deductibility nature of the travel portion.  Travel meals should also be documented separately from all other meals in case it is more beneficial to use the per diem rate for meals rather than actual expenses.
  • Uniforms, unique, or special work clothing such as steel-toed boots or coveralls.  Clothing adaptable to normal street wear is not deductible.
  • Utilities on business facilities.
  • Wages paid to employees.

DISCLAIMER: This information is general in nature and limited to examples of such deductions.  In addition, the specifics of each taxpayer’s circumstances are different and application of this general information to specific taxpayer circumstances may require interpretation.  We are therefore not responsible for the application of this general information to the specific circumstances of a reader unless we have been engaged as the reader’s tax preparer or consultant.

Do you need a professional tax consultant for your business? Our firm and its predecessor firms have provided tax preparation and consulting services to businesses in western Pennsylvania since 1942.  We specialize in small businesses and nonprofit organizations and provide services at all levels from bookkeeping and payroll to audits under GAAP or GAGAS guidelines to preparation of reviewed and compiled financial statements according to SSARS to annual income tax preparation.

Please feel free to refer to the CONTACTS information listed on this blog to speak to a firm representative of Roy & Associates, PC.  We welcome new business.

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