By On Call Attorney Todd Kulkin

A new business owner has a lot to learn when getting started. One of the first lessons that you need to learn is how to minimize and manage your business’ tax liability. Although the tax code can be confusing, and you can spend your entire lifetime trying to understand it, no business owner should get started without knowing the ins and outs of the business expense deduction.

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The internal revenue code (I.R.C.) defines a business expense as “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” I.R.C. ยง 162(a). This deduction is taken off of the Adjusted Gross Income (“AGI”) on your tax return. This definition is left intentionally broad, since each and every business has different needs. For example, a motorcycle repair shop may deduct the cost of wrenches, tires, and motor oil since those expenses are part and parcel of their business. By contrast, a law practice would not be able to deduct such expenses, since those tools are not necessary or even appropriate for the practice of law.

Despite the specific nature of one’s business, some expenses are universal (or nearly so), and every business owner should be aware of them. The fees paid for incorporation are generally tax deductible, as the act of incorporation furthers the business. Through the same logic, a business membership in Rocket Lawyer, or other legal fees, can be deductible; obtaining legal advice is necessary to run a successful business. This is not the case, however, for personal legal services. Hiring an attorney to consult on your company’s contracts is deductible; hiring an attorney to handle your divorce is not. Why? Because one is directly business related, and the other is entirely personal.

Some expenses are only partially deductible. For example, mileage on a company vehicle while travelling for business purposes is deductible at a flat rate (currently $0.55 per mile). Entertaining your customers, or hosting business dinners, is only deductible up to 50 percent of the expense. If you want to know more about what is deductible at which rates, consult a quality accountant. Since an audit can come at any time, it’s always good to have supporting documentation for your expenses. It’s a good practice to hold onto, or scan into a company database, all of your receipts for business expenses; other expenses, such as mileage, inherently need support by other documentation (e.g. travel log).

When clients ask for a good rule of thumb, I tell them to employ the “tell your mother” test: if you would be able to tell your mother (with a straight face) that the expense is primarily for a business purpose, then it’s worth telling your accountant about it, or putting it down on your form 1120 (corporate tax return) if you’re doing your taxes yourself. If you are ever unsure about the deductibility of an expense, always ask an attorney or an accountant for advice.

Christopher C CarrTodd Kulkin is a business attorney specializing in legal services to small to medium sized businesses, start-ups and nonprofit organizations. He has a unique commitment to flat fees, personalized law services and education on the legal issues surrounding your business.

Get started Incorporate Your Business Answer a few questions. We'll take care of the rest.

Get started Incorporate Your Business Answer a few questions. We'll take care of the rest.