“But really, it’s a business expense !?”
As I work with small business, I hear this frequently: “These expenses are required for me to run my business and I want them recorded on my business books”.
The reality: you may want them recorded and consider them a necessity, but the IRS tax rules may say: they are not deductible.
You and your monthly accountant
Let’s dive in to this a little deeper. I have one perspective as a “monthly-accountant” (or “outsourced Controller / CFO” for your business). When clients come to me and say: “This is not a personal expense, record this on my business financials”, I may record it. I know they are an LLC and not a public company. They have no stock-holders. So, sometimes I can do what they ask and record the amount as a business expense.
A business owner still needs to know …
But I also have to tell clients: “We”ll have to isolate this and you’ll need to explain this to the bank since you decided to get a loan”. Or, “I can do this, but we’ll have to isolate this because your tax pro may tell you it is not tax deductible”. And sometimes I need to say “This really needs to be a draw because this is not close to being a grey area” – meaning it is coded as personal on the business books and doesn’t even hit the Business Profit and Loss statement.
So, realize that even though you think items are important for your business — and they may be:
- you may not get tax deductions for some expenses
- you may have to isolate them and explain them to the bank when getting a bank loan
Tax Deductions? No.
Let’s jump right in and look at some key examples that are not tax deductions. These are some expenses that clients ask me to record, but they are not tax deductions. (If you think you have a grey area, get it clarified upfront from a tax CPA.)
Even if it’s important for you to look nice … unless it is a uniform or specialized gear like a hardhat … No. If you can wear it outside of work, it’s not deductible.
You can take a deduction for your home office, BUT you need to meet IRS specifications. You need to make sure it is “regularly” and “exclusively” used for business. For example, your kitchen won’t count even if you work there sometimes at night. No.
Or let’s say you run a daycare and want to deduct the bathroom. Again, the answer is probably No because when the children are gone, your family uses the bathroom.
“I drive to the business I own, can I count that as mileage?” You can count miles driven for business and you should track mileage. But the IRS knows people drive from home to work, so even if you are a business owner, you can not count this — it is considered a commute.
Federal Tax Fine
If you got a fine for not doing your taxes on time last year, you can’t deduct that on this year’s taxes.
I know, the country club may help you network. But it is not tax deductible. Also, the fitness facility helps keep you healthy to work more hours on your business. But No, not deductible.
See you tax CPA for this one. It is limited!
I have met many people who “start a business” when they have a full-time job. Some are serious and some are dipping their toes in the water. Just know the IRS has guidelines on whether it can be considered a business — and have deductible expenses. If you are doing this, for sure see a tax CPA.
I have heard “I love owning my own business. I push through all expenses I have. It’s great to have everything be a business expense”.
If you say that to an accountant at the next party, you will probably get a “hmm…not really” and that’s it because we have heard it before and we don’t want to get in to a debate at the party. But if you come to our office, we will explain in more detail that you really can’t push through “all” expenses on your tax return.
The reality is if you push through “all” expenses to your business, you may be putting yourself and your business at risk from different perspectives. Don’t risk getting audited and the wrath of the IRS.
Good News: there are legitimate tax deductions and great tax CPA’s
Build your business the right way and make money. As a small business monthly accountant, I may book some non-tax deductible items for you on your business books and then highlight them. I may book them because you consider them business and want to see them on the Business Profit & Loss statement. But taxes are a different story. Make sure you do it the IRS way for taxes. And make sure the bank understands what you are doing if you are getting a loan.
The good news is that there are legitimate tax deductions. Its’ the tax CPA who can help you with legitimate tax write-offs you may not even know about. Do it Right.