What is a business expense?
Ah the age-old question: can I deduct that?
This is a subjective and nuanced issue, ever-evolving especially in the US as our tax code changes and grows, but there are some accepted guidelines that can be observed that will allow you maximum benefit and minimum risk.
First to consider is whether the expense benefits the business primarily. This can be an easy question sometimes (business dedicated cell phone bills, office rent, advertising costs, etc) or it can be complicated (travel, meals, automotive costs). It’s important to ask yourself the question “would I have purchased/paid for this expense for my own personal use?” If the answer is “no” then you have a clear route to deducting it on your books.
Where it gets more complex is if you answer “yes” to that question. Let’s look at some of the most common disallowed expenses for audited businesses: meals and travel. For meals it’s an easy designation: the IRS will not buy your lunch, whether you are traveling or not. Your meals expenses have to be with someone who is relevant to your business dealings, such as a colleague or potential client/customer, and even then you only get to deduct 50% of the cost as a valid expense (the other 50% gets removed during the tax process). So you have to record who that meal was with and what it was about in order to fully audit-proof the deduction, and even then they are easily challenged by auditors. We at Formations always recommend using your company funds only for easily identifiable meal expenses. Your daily Starbucks cup will not qualify unfortunately.
Now let’s talk about Travel, which is one of the other most widely “abused” deductions according to the IRS. The types of travel expenses that are easiest to deduct and defend are lodging, airfare, and transportation (taxis, Uber/Lyft, buses, etc). These are costs that are easily defended because you likely would not have to pay for them if you were not traveling for business. Where it starts to get complicated though is if you are combining personal and business travel. Let’s examine a scenario:
Jim wants to take his wife, Pam, and their children with him to a conference in Austin. The conference is 100% a business need but he also sees the opportunity to have some family fun on vacation. How does he manage this?
One tip I’d extend them is that he should use his business card/account for the clear business expenses, such as the lodging costs, and any transport that is him alone going places for business, as well as any qualified business meals where he’s meeting people to have lunch/dinner away from the family. Then use his personal cards for anything that may involve his family; things like amusement costs, family meals, etc. This creates clear segregation between the business and family that’s necessary.
Where the complication starts coming in is in various expenses like airfare; usually to book a flight all together with multiple parties you need to make the booking together on the same payment. It will be imperative for Jim to communicate with his accountant to designate how much of those costs were for his travel and make sure that Pam and the kids’ costs are designated as “shareholder distributions” on the books. It may even be a good idea to submit an “expense report” to his company to outline the correct expenditures and keep it on file in case of an audit.
To summarize it can be a challenge thinking of appropriate expenses to heap on the business instead of personally but you can always confer with your Formations representative if you have questions about any expenses and how to guarantee they are defensible and correct. As usual just pick up the phone or hit the chat button and we can get you the answer.
Not a Formations customer yet?