Deducting Personal versus Business Expenses

Today we’re going to talk about deducting personal versus business expenses. What are personal expenses versus business expenses? The first step is determining when you can deduct business expenses is to define what those are.

What is a Business Expense?

A business expense is something that’s ordinary and necessary to run and operate your business. That’s a definition by the IRS. That’s pretty broad, right? So you can have one company that has expenses that are much, much higher in a related area than other companies in a different industry. But for each of those industries, that may make sense.

There are instances when there is a set of expenses that most small business owners incur. That could be software costs, it could be telephone, it could be rent, if you have a brick and mortar, things of that nature. Most small business owners incur some similar expenses. But there could be unique, special industry specific expenses that you need to be aware of. It may not be in another industry. So you know, capturing that and understanding that you need to capture that information is really important to helping reduce your taxes, as well as get a good gauge as to where you’re spending your money.

Who Can Deduct Business Expenses?

When you think about it, it almost seems to be too easy. If you spend money for your business, those expenses should be captured as business expenses and deducted for you for tax purposes. But we still get that question all the time. What are the types of business expenses? 

Take a step back and say, what are the costs that I need to incur to run my business? For example, somebody who’s in a medical profession. Look at the licenses, services, certification, conferences, and keeping up with those kinds of things. You may not think about that, but all those things that you had to incur to get your business started and operate as that medical professional would be deductible.

You may also look at your industry. For instance, I helped somebody who was in an IRS examination. The IRS agent wanted to know why a real estate agent had some gifts and expenses for their clients as deductions. I told her that any successful real estate agent is going to provide their clients with usually a small gift or token as a congratulations on the day that they settle. This is normal practice for this industry. The IRS agent agreed with me and that item was no longer on the table for further examination. 

When are expenses deductible for tax purposes? It really depends on your industry, and what types of expenses are typical. Some expenses, such as meals and entertainment are heavier in certain industries because the person has to go out and sell and network and meet with their clients on an ongoing basis.

How Does Deducting Business Expenses Work?

We get that question all the time as well. What is a typical level of expense for my industry? It all depends on what you actually are doing. But there are certain industries that have higher expenses in certain types of expenses. But there are also expenses that you have to incur, but you may not get 100% deduction for. For example, client gifts are maxed out by the IRS at $25 per person. So even if you spend $100 in the gift for somebody, you’ve incurred that $100 that is expensed that you would record in your accounting software, but you only get $25 for a deductible expense for your business. There’s other types of expenses similar to that or have had different accounts.

We’ve had a client who was opening a new brick and mortar office and decided that they needed some decor in the building to help make it more homey and more appealing. They purchased some artwork that was not super expensive. But it was artwork for the office. Now, there may be a distinction between that thousand dollars of artwork for the whole office versus something much higher, like a $500,000 piece of art for the lobby. Is that ordinary and necessary for my business? It goes to how you are in that type of industry.

Deducting Personal Versus Business Expenses When They Are Mixed Use Expenses

What happens when there’s mixed use – when something is personal and business? What’s the best way to gauge that and look for that kind of stuff?         

This is a lot harder, because you have for instance, a cell phone, internet, your car that you may be using for business and for personal use. So it’s gonna require a lot more tracking, a lot more discussion, a lot more monitoring, as to the amount or what percentage of use in your business versus what you’re doing, personally. Some sort of allocation would have to be done to be able to take those expenses as a business expense.

Some good examples are like a cell phone that you have in your personal name that you use for business. Things like your automobile, when you’re using it for business, miles when you’re driving to, let’s say, a networking event from your office or from your home to the office. Those are types of mixed use, where the asset may be a personal asset, but you use it for business. 

It can also go the other way, let’s say the business owns the vehicle, but you have the ability to use it on a regular basis for personal use, let’s say over the weekend. There is a personal component to that asset. Those things have to be looked at and adjusted for.

The IRS has a lot of different rules about that. So you want to make sure that you’re following those rules closely to maximize your business deduction to be able to not have any issues down the road if you get audited.

Deducting Personal Expenses as Business Expenses

Today talking about deducting personal versus business expenses, we talked about all the business side. Are there some personal item expenses that can be deducted that don’t relate to the business?

There’s not many anymore, at least for federal tax purposes. You really kind of stuck with what’s on your itemized deductions. And that would be, you know, medical expenses that exceed the cap set by the IRS, the floor set by the IRS. Real estate taxes, income state and local income taxes, mortgage interest, charitable contributions.  You used to be able to as an employee take unreimbursed expenses from the business for that the business hasn’t burst you for that you incurred personally as the employee but you can’t get that for federal tax purposes. Some states do allow it but for the federal government that deduction is no longer existing.

Conclusion

To wrap things up, we discussed deducting personal versus business expenses. We talked about what business expenses are and the definition. We talked about the deductibility of some of those expenses and then how some expenses are personal versus business and can be a mixed use type of expense.