Deductible business expenses are more than just the cost of doing business. They are also a way to keep your taxes low and to know when you are actually making a profit and how. For business expenses, though, to be correct and have the most impact, you need to be able to deduct as much as possible.
Does your business maximize its deductions by knowing the rules? If you're not sure, here are five basic ways to ensure deductibility of any expense.
1. Ensure They're Ordinary. To deduct a business expense, it must first be 'ordinary'. This means that a business in your your industry and of your type would likely see this as a common and reasonable cost. An ordinary expense often includes things like supplies, repairs, manufacturing parts, and advertising. But it could include more unusual things like travel or gifts as long as they are a relatively common among similar businesses.
2. Ensure They're Necessary. Even if an expense is considered normal in your industry, it should also be necessary to do business. While traveling to gain education might be considered an ordinary expense, how specifically does the travel help you earn more business or money? A brewer who attends a beer festival might make necessary contacts or earn needed reputation points. But a visit to a comic book convention would likely be a harder sell.
3. Ensure Travel is Within the Rules. Some of the most denied business expenses are related to travel. Before embarking on any kind of travel or submitting any related expenses (such as meals, supplies, or mileage), go over the travel deduction rules with your accountant. Doing so will ensure that you don't splurge on expenses that will not benefit the company.
4. Ensure You Follow Reimbursement Guidelines. Reimbursement of expenses paid by vendors, employees, and owners are usually deductible as long as you follow the guidelines for reimbursement. The simplest of these is to get a detailed listing of what was purchased and why as well as to have employees return unused funds. Giving an employee a blanket amount of money without receipts might damage your deduction and even create taxable income for the individual.
5. Ensure It's All Legal. It may seem obvious, but never assume that an expense is fully legitimate. Only expenses that don't involve violations of federal or state rules may be deducted. Avoid most fines and penalties, as these often cannot be deducted. Don't attempt any kind of subtle bribery or kickbacks. If you're not sure about an item, consult with your attorney before paying it.
If you follow these few guidelines, you will increase the number of deductible expenses and decrease any that don't help your bottom line. For more information, meet with a business accounting service today to discuss your particular situation.