Everyone loves taking deductions on their business taxes. Everyone, that is, except the IRS. In a perfect world, you could deduct anything under the sun and have to pay no taxes at all! The reality, though, is that some deductions are safer than others.
The IRS is only somewhat helpful in determining what can be deducted and what cannot. On the one hand, it’s a good move to build flexibility into their system. Not every industry or business has the same needs, after all, so trying to force them all into the same cookie-cutter shape is a bad move right from the start.
The flip side is that this flexibility comes with a lot of uncertainty. But it’s precisely because every business is unique, even in the same industry, that there is so much gray area in allowable deductions. Nobody wants to be audited, so business owners often bite their nails over whether the IRS will agree that their deductions are valid.
So let’s get into how the IRS looks at business deductions by looking at the two words that matter the most, and why you must develop a strong, ongoing relationship with your CPA.
Is Your Deduction “Ordinary” and “Necessary” According to the IRS?
Those are the two words you need to be paying attention to because the IRS surely will: “ordinary” and “necessary.”
According to the IRS, “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
The difference is in the details! “Ordinary” means your industry in a broad sense, while “necessary” means your specific business. It has to be both for the IRS to look at it favorably.
As a very simple example, if you’re running an “ordinary” landscape company, you will need a lawnmower like other professionals in your industry. An antique push mower would do the job, sure, but it’s physically strenuous and not very efficient. Instead, you may find it “necessary” to invest in a top-of-the-line ergonomic commercial riding mower to help improve efficiency and reduce fatigue and back problems.
Monarch CPA keeps track of all the current rules and changes so we can advise you on the best deduction options for your business and reduce your tax burden.
Your Business Accounting Helps Justify Deductions
When choosing your deductions, it’s important to be able to show a complete picture. If your expense doesn’t seem “ordinary” for your industry and “necessary” for your business, you’ll need to provide extra documentation to make your case.
If you’re running that landscaping company, perhaps you want to deduct your home landscaping costs from your taxes. Usually, that won’t pass the IRS’ sniff test. But what if you regularly meet with high-end clients at your home and your landscaping is an example of your expertise? Under those circumstances, part of it may be deductible.
Because this is an unusual approach, you’d want good bookkeeping records of the client meetings at your home, how your home landscaping is used in your marketing efforts, and other supporting documentation so it’s clear to the IRS that the purpose was primarily business-related. If you don’t have nice grounds at your own home when they come to meet with you, how can you instill confidence in your clients?
How Case Law Influences Recommendations for Your Taxes
One of the tools we use to advise you on your tax deductions is case law. Studying this history is useful in determining what has (or has not) been allowed over time. We keep up on the news of what tax cases have gone to court and what the outcomes were.
These cases tell us that yachts and country club dues are not typically allowable as deductions unless you are a chartered boat company. Pet expenses aren’t typically going to fly unless your animal is a mascot or influencer for your business, a service animal that makes it possible to run your business, or an animal cared for to reduce pests and make your location safer. And while makeup, hair care, and other personal care products are usually no-nos, sometimes they can be deducted if they are specifically used for marketing photos or a competition. One such case was a bodybuilder who was able to deduct body oil for his competitions!
Experience Helps Monarch CPA Ask Questions First
At Monarch CPA, we work with clients across many industries. We know that to give you the best service we need to understand you and your business. This means we’ll ask you a lot of questions to get to the heart of your purchase decisions and find the justification for an expense to the IRS. And, we’re always open to conversations with you about whether your specific expenses can be used as deductions!
We were able to help one of our past clients deduct his trips and expenses for Disney World because his business makes souvenirs. He was meeting with clients and doing legitimate market research! Many of the costs related to travel, lodging, food, and souvenirs are now eligible for deduction.
We’ll ask you questions. And, we invite you to ask them of us! If you consider something in your finances to be a business expense, talk with us about it. Help us understand how it fits into running your business and why it is needed so we can better advise you on your deduction options.
You’re the expert on your business. Monarch CPA is the expert that helps you understand your tax implications.
Monarch CPA Advises You on Deductions
We have a holistic approach when we advise you about your deduction options for your business taxes. We take what you’ve told us about your business and financial decisions to see if a good case can be made for an expense under tax law. And we look at established case law, where previous taxpayers have gone to court and the merit of their deductions has been reviewed. We also base our advice on our experiences with other clients and how that may apply to your unique situation.
The IRS has many rules about what can and cannot be deducted from your taxes, or even when the deductions can be used. When we understand your business and financial decisions we can better advise you on what deductions to claim or not, keeping you on a safe course.
What expenses do you have for your business that may not be obvious to someone actively working in your industry? Schedule a call with us to discuss how they may be deductible on your taxes!