Dos and Don’ts for Business Expense Deductions
As tax season heats up, companies of all kinds and sizes will be on the hunt for ways to reduce their tax bills. One of the most common ways is through business expense deductions, but not every such expense is deductible. Here’s what to know about the expenses that you can — and can’t — properly claim on your federal income tax return.
Deductible Expenses in a Nutshell
Under IRS rules, a deductible business expense must be both ordinary and necessary. An ordinary expense is one that’s common and accepted in your industry; for example, paper and ink for a printing company. A necessary expense is helpful and appropriate for your business, though it doesn’t have to be indispensable. An example might be television advertising.
You might not be allowed to claim an ordinary and necessary expense in the year that you paid or incurred it. In fact, you may not be able to deduct the expense at all. The IRS cautions taxpayers to distinguish their “usual business expenses” from expenses used to calculate the cost of goods sold, capital expenses (which are typically recovered over a period of years through depreciation or amortization) and personal expenses.
Personal expenses aren’t deductible by a business. You can, however, allocate expenses from items or services that serve both personal and business purposes, such as phone, internet or vehicle expenses. The amounts allocated to business purposes may be deductible, but you’ll need documentation to back up the allocation.
Travel and Commuting Expenses
Expenses related to business owners or employees traveling away from their tax homes or main workplaces for business purposes are generally deductible. You’re considered to be traveling “away from home” if more than an ordinary day’s labor is involved, and you’ll need to sleep during that time, to meet the demands of your work.
Travel expenses for conventions are deductible if attendance benefits the business. Note that special rules apply for conventions held outside North America.
What about commuting? Expenses for commuting to and from work aren’t deductible by an employee. Other deductions have also been eliminated under the 2017 Tax Cuts and Jobs Act (TCJA). Specifically, no deduction is allowed for expenses incurred for providing transportation, or any payment or reimbursement to employees, in connection with travel between an employee’s residence and place of employment. The TCJA also doesn’t allow deductions for qualified transportation benefits, such as transportation in a commuter highway vehicle, transit passes or qualified parking.
Some taxpayers mistakenly believe that they can deduct their expenses for entertaining clients or similar individuals, but the TCJA changed those rules, too. No business deduction is allowed for any item generally considered to be entertainment, amusement or recreation. The prohibition also applies to expenses for a facility used in connection with such activity.
Entertainment includes clubs and memberships, regardless of whether the club is organized for business, pleasure, recreation or other social purposes. Dues or membership fees for such organizations aren’t deductible if one of the organization’s principal purposes is conducting entertainment activities for members or their guests or access to entertainment facilities.
Food and Beverage Expenses
The temporary 100% deduction for food and beverage expenses ended after 2022. Now, you can deduct 50% of these costs if they aren’t “lavish or extravagant,” and you or one of your employees is present. This applies to food and beverages provided to customers, clients, suppliers, employees, agents, partners or professional advisors — whether established or prospective.
Food and beverages might be deductible even if they’re provided at a nondeductible entertainment activity. But such a deduction is available only if:
- The food and beverage items are separately purchased or identified from the entertainment costs on one or more bill, invoice or receipt, and
- The amount charged for food or beverages reflects the venue’s usual selling cost for those items if purchased separately from the entertainment or approximates the reasonable value of those items.
Say, for example, that you take a client to a Taylor Swift concert. The ticket costs won’t be deductible. But if you buy the client popcorn, nachos and drinks while there, you can deduct half of those costs if you have proper documentation, such as the itemized receipt.
Important: Food and beverage expenses related to recreational, social or similar activities for employees, such as a holiday party, are fully deductible as long as highly compensated employees aren’t favored.
You generally can deduct no more than $25 of the cost of business gifts you give directly or indirectly to each client or customer during your tax year. The limit doesn’t include incidental costs — such as engraving, packing or shipping — if they don’t add substantial value to the gift. Gifts costing $4 or less that have your business name permanently engraved on them and that you distribute on a regular basis (for example, pens or tote bags) also don’t count toward the limit.
The purchase price for vehicles you use in your business generally must be capitalized, meaning you’ll recover the cost through annual depreciation deductions. Certain vehicles, however, may qualify for the first-year bonus depreciation deduction or immediate expensing under Internal Revenue Code Section 179. Routine maintenance and repair expenses generally are deductible in the year incurred.
Minimize Your Taxes
The rules for which business expenses are deductible and to what extent can be tricky to navigate. Contact your tax advisor to help ensure you secure all the deductions you’re entitled to claim.
This article appeared in Walz Group’s January 29, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.
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