If your business operates as a corporation or limited liability company (LLC), your business and personal taxes are fairly distinct. However, it can be a bit more complex to maintain tax separation when you own a sole proprietorship or participate in a partnership. While it’s pretty clear that you can’t deduct personal expenses such as the cost of groceries to stock your cupboard, some costs can be trickier. What about gas for the car? Are meals covered when you’re meeting a client? How about when you’re traveling to meet a client? The nuances can be daunting.
Generally, you can figure how much of a given cost was incurred as a direct result of your commercial activities, then subject the resulting portion to the “ordinary and necessary” test. In other words, the expenditures must be customarily accepted as business expenses in your particular field. As an example, if you take out a loan and use 60 percent of it to purchase a food truck for your mobile taco business and spend the remainder on a home remodel, 60 percent of the loan interest may be deductible as a business expense. Here are some common deductions to consider.
Legal and Professional Services
Fees for professional services such as accounting and legal consultations directly related to the operation of your company can typically be deducted as business expenses. Unfortunately, the costs of legal expenditures incurred during the acquisition of business assets cannot ordinarily be deducted. Expenses involved in perfecting and defending title, exchanging property, and property development or improvement are required to be capitalized and added to the property’s basis.
If you itemize deductions, you may be able to deduct the personal portion of your legal fees for collecting or producing taxable income, for maintaining your employment, or for tax advice using Form 1040, Schedule A. You may also deduct the cost of preparation for the part of your income tax return related to your sole proprietorship or partnership as a business or trade expense.
Home Office and Other Home Business Use
If you conduct business from your home, you may be allowed to claim some costs of maintaining your home. Deductible expenses could include depreciation, insurance, repairs, utilities and mortgage interest. There are strict guidelines governing home expense deductions. You must typically meet the “exclusive use test” by demonstrating that your home office serves as your principal place of business by satisfying the following criteria:
- Your home is used regularly and exclusively for the management or administration of your business or trade, and
- There are no other fixed locations at which you conduct substantial administration or management of your trade or business.
Note: You are exempted from the exclusive use test if:
- A portion of your home is used to store product samples or inventory for your business, or
- You use part of your home as a daycare facility.
You may be able to deduct some of your automotive expenses. Bear in mind that you can only deduct the costs directly related to commercial use. If your vehicle is driven for personal and business use, you must determine the business-use percentage based on the miles traveled for your company.
The IRS permits you to take a standard deduction based on a per-mile rate, or you may opt to deduct your actual vehicle expenses. If you use the standard deduction, you can’t deduct depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, or registration fees. Carefully consider whether taking the standard deduction or actual expenses would be most beneficial when filing.
Mind the Percentages
Keep good records so you can easily separate your business expenses before you file. If a deduction is available, you should claim it. Just make sure to take the actual percentage allowed.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.