What is a Business Deduction?

“A Business deduction is all the ordinary and necessary expenses paid or incurred, during the taxable year, in carrying on any trade or business.” – The IRS

The IRS gives you lots of leeway in expenses. Of course, the trade-off is, you’ve got to document them properly.

Any time you are thinking about whether or not an expense is deductible, as yourself two questions:

1. Is it an ordinary expense that occurs all the time for your business and comparable businesses?
2. Is it an appropriate, or helpful, expense for your business?

In the right circumstances, and properly documented with receipts and paperwork, just about anything can be considered an ordinary or necessary expense for operating your business.

What is a “Hidden” Business Deduction?

Hidden business deductions are things you are paying for with after-tax dollars that you COULD pay for with pre-tax dollars. Every dollar you move to the pre-tax line reduces your taxable income and your overall tax bill.

Some of the most common examples of hidden business deductions are things that you use every day. Like your cell phone, your computer and your car. Do you need to exercise some caution here? Of course you do! These are items that you will probably use for both business and personal use. The IRS knows that these are mixed-use items.

Take cars for example. Even though you may truly just use your car on business-related errands, it’s very difficult for the IRS to believe that. If you were to try and deduct 100% of your operating costs for that vehicle, you could easily find yourself on the receiving end of some difficult questions. It’s easier to take something like 85% of your costs and sleep well at night.

Phones are another area to keep an eye on. The IRS isn’t going to insist that you give up your iPhone and get something cheap for business. They probably won’t even blink at your phone bill (which if it’s like mine runs $100+ each month with data, text, talk, etc.). But if you employ your kids in the business and give them cell phones too, also with unlimited talk, text and data, you could face some questions. It’s okay to employ your kids, and it’s reasonable for you to be able to contact employees – but it’s probably a good idea to attribute a portion of their phone costs to personal use.

Last is your computer. There is no question that you couldn’t operate your business without it. So don’t be afraid to write off the entire cost. Are you probably going to use it for personal things some of the time? Yes, no question. But you could not run your business without it, and that means it’s a deductible expense, along with all of your business-related software.

Think about the computer itself. The IRS knows what the average cost of a computer or laptop is. If you buy an extreme model, designed for very high-end gaming, and with a price tag to match, you may need to explain why you needed so much power for your business. And again it could be perfectly reasonable. Maybe you create games, or test and blog about games, etc.

I guess there’s a 3rd question when it comes to expenses:

3. Can you justify this expense as a business expense without giggling?

If you can, you’re good. Make sure you have the right documentation to show why you spend the money and how it relates to your business.

If you can’t … well maybe you need to rethink the expense. Talk with your CPA or tax preparer. There may still be a way to turn it into a perfectly legitimate business write-off.