On January 19, 2016, the IRS will begin processing 2015 tax returns. If you have not yet looked at your past year’s expenses, it may be time to brush up on what are considered business expenses approved by the IRS.
Essentially, business expenses can be deductible if they are ordinary and necessary, and your business operates to make a profit. Ordinary expenses are defined as expenses common in your line of work while necessary expenses are defined as expenses that are helpful for your business.
It’s important to consult with a tax professional to understand the deductions that are appropriate for your business since it can get tricky. For example, some of these expenses (see below) are not deductible all of the time, and many are subject to limitations or only available in certain circumstances. You can check out the IRS business expenses section to get a better understanding. We’ve compiled a few expenses that may surprise you, and save you a few bucks.
Taxes and interest payments
You can deduct estimated state or local tax payments, foreign income tax payments, and property tax payments that are directly attributable to your business.
Fifty percent of meals and entertaining costs are deductible if the meal or entertainment has a clear business purpose. In addition to the receipt, you should keep a record of who was present and what business was discussed.
Educational expenses (related to your present work) that maintains or improves your skills is an expense. But be careful, fees for entrance exams such as the Bar Exam and GRE are not.
If part of your home is used regularly and exclusively for your work (it must be a space devoted to your business), you can deduct the portion of your home that is used for your business.
Travel and transportation
If you travel for business, you may want to consider upgrading to first class or the presidential suite because the entire cost is tax deductible. This also includes the cost of travel such as gas, airplane tickets, and tolls. You can even expense your passport if it is needed for business travel.
We all know the term “charitable deduction,” but did you know that the mileage you drive to donate or volunteer is also an expense? Publication 17 of the IRS states that you can deduct as a charitable contribution any unreimbursed out-of-pocket expenses, such as the cost of gas and oil, that are directly related to the use of your car in giving services to a charitable organization.
Feeling charitable? Read this Legal Checklist for Charitable Donations to make sure your donations are going to the right place and your charitable contribution is properly claimed on your tax return.
So what can’t be expensed?
Like many small business owners, I was bummed to find out that commuting costs such as subway fare, tolls, gasoline, and parking are not deductible. Only travel costs not related to travel from home to or from work are deductible. Another surprising non-deductible expense? Dues to athletic clubs, social clubs, or gyms.
If you have questions about what to expense and how to document those expenses, Rocket Lawyer recommends reaching out to one of the qualified tax attorneys in the Rocket Lawyer network. You can also simply ask a lawyer any tax question here. It’s that simple.