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Are You Claiming All Allowable Business Deductions

September 23, 1999
Related Topics: Finance/Taxes, Featured Article
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Issue: Budgeting is on your mind and you want to make sure that all of your business deductions are in order. Throughout the year, you and your employees have saved receipts, kept careful records, and tracked appropriate expenses. Before you go forward, it's time to determine which of those expenses are legally deductible. How can you be sure which deductions are and are not allowed by the IRS?

Answer: A deduction for an expense paid in connection with your business will be allowed only if the expense is "ordinary and necessary" for the operation of the business. The IRS is rather flexible in this regard; it defines "ordinary" as an expense that is common and accepted in a field of business, and defines "necessary" as an expense that is helpful and appropriate to a business. Most common business expenses will pass muster without serious question. IRS agents use the following test to make sure that the expense is actually spent, and (1) furthers the business (instead of personal or family needs), (2) is not being deducted elsewhere on the return, and (3) is a current, rather than capital, expense.

Common Deductible Business Expenses

  • Advertising
  • Bad debts from sales or service
  • Car and truck expenses
  • Commissions and fees
  • Depreciation
  • Employee benefits programs
  • Insurance
  • Interest
  • Legal and professional services
  • Meals and lodging
  • Office expenses
  • Pension and profit-sharing plans
  • Rent or lease expense
  • Supplies
  • Travel expenses
  • Utilities
  • Wages for employees

Common Nondeductible Expenses

  • Bar or professional examination fees
  • Capital expenditures (not fully deductible in the year placed in service, but yearly depreciation deductions are allowed to recover the cost over a specified time period).
  • Country or social club dues
  • Commuting expenses
  • Estate tax (even if largely due to the ownership of a business interest)
  • Expenses, including interest, paid to generate tax-exempt income
  • Federal income tax
  • Fines and penalties incurred for violations of law, such as traffic tickets, child-labor violations, or federal income-tax penalties
  • Gift tax
  • Gifts (that are valued at more than $25) to employees
  • Gifts to individuals
  • Hobby losses
  • Inheritance tax
  • Interest on indebtedness incurred by a business taxpayer to purchase life insurance coverage in excess of $50,000 on the life of any of its officers, employees, or other person having a financial interest in the taxpayer's trade or business.
  • Interest on indebtedness incurred to purchase single premium life insurance contracts, or any life insurance contract under a plan of financing the purchase by withdrawing some or all of the yearly buildup in policy cash values
  • Job hunting expenses
  • Life insurance premiums, if the business, or the business owner, is a direct or indirect beneficiary
  • Lobbying expenses
  • Partnership organizational expenses, unless amortization election is made
  • Personal, living, or family expenses-however, certain interest, taxes, bad debts, medical expenses, theft or casualty losses, or charitable contributions may be deductible in whole or in part as an itemized deduction. Child or disabled dependent-care costs are allowed as a credit.
  • Political contributions, including tickets to political dinners
  • Tax penalty payments
  • Transfer taxes on business property

Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health care and small business professionals. CCH offers human resource management, payroll, employment, benefits, and worker safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.

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