When you own a business, expenses can quickly add up. Businesses should try to keep personal and business expenses separate. Sometimes, that proves difficult for small businesses. So, if you do keep expenses together, keep all business receipts. Then, make a notation or category for business expenses so you can easily find those at tax time.
“Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated for a profit.” IRS Pub 535
Expenses should be ordinary and necessary. Ordinary means common and acceptable in your industry. The expense should also be appropriate and helpful. It is easy to find examples of expenses that the taxpayer disagreed with the IRS as to ordinary and necessary.
For example, the IRS closely watches cell phone usage. You can only claim the business portion of expenses. So, you must calculate the portion of business usage because you likely use it for both.
“Generally, you cannot deduct personal, living, or family expenses.” IRS Pub 535
You should be careful to save receipts from large retailers, i.e. Costco, Amazon. In an audit the IRS will generally want proof that these expenses are for business purposes.
Some additional expenses that can be tricky include:
- Business Use of Home. If you use part of your home for business, you may be able to deduct expenses. The area of your home must be used regularly and exclusively for business. Calculate the percentage of your home used for business and then you can deduct this portion of mortgage interest, insurance, utilities, repairs, and depreciation.
- Business use of your car. If you use your car for both personal and business purposes, you must divide expenses based on actual mileage. Look at my post on this subject for more information.
- Interest. If you borrow money and use part of the money for personal and part for business, figure out a percentage for each and only deduct the business portion of the interest you paid.
Always be careful when claiming expenses that they are for business purposes. In the weeks to come, I will add more information to help you complete most of your own accounting.