Bottom Line: Ordinary and Necessary
A business expense is deductible if it is BOTH ordinary and necessary.
Ordinary – an expense is ordinary if it is common and accepted in the industry of the business.
Necessary – an expense is necessary if it is helpful and appropriate for the business.
Common deductible expenses include:
Business bad debts
business bad debts are deductible when they become partly or totally worthless if the uncollectible amounts have been reported as income.
Capital costs:
capital costs include the costs incurred in the start-up process, purchase of business property, costs used to improve business assets, and so on. They may be deductible immediately when incurred or spread out overt time through depreciation or amortization.
Cell phones:
cellphones provided to employees for business purposes is deductible.
Education expenses:
in general, education expenses are deductible if they are necessary to maintain or improve a taxpayer’s skills required in his trade or business, or to meet regulation requirements in order to keep the taxpayer’s license active.
Gifts:
business gifts are deductible subject to a $25 per customer limit.
Home office:
if a taxpayer uses a specified area of his home, exclusively for business purposes and on a regular basis, he may deduct home office expense based on the size of that work area.
Insurance:
such as expenses for general liability insurance, professional liability insurance, health insurance for employees, and business vehicle insurance.
Legal and professional:
such as fees you paid a lawyer or accountant to help you set up business entity, draft contracts, prepare tax returns.
Travel and meals:
lodging and transportation expenses incurred while taxpayer is temporarily “away from home” on business duty are deductible. Meals are generally deductible if incurred while on business travel, and they may be deductible if provided to clients or employees, subject to 50% limit.
In contrast, the following is a list of non-deductible expenses sometimes confused with certain deductible expenses above:
Nonbusiness bad debts:
when you make a loan to your friend for personal reasons, you may claims a bad debt loss only if you are ready to show that there is non reasonable expectation that the debt can be repaid. Such bad debts are treated as short-term capital loss, not a direct write-off against your ordinary income.
Commuting expenses:
costs related to driving from your home to office daily are commuting expenses, not travel.
Entertainment:
starting 2018, most business-related entertainment expenses are no longer deductible. So while you may still deduct that $20 gift pen to a client, or partial cost of meal paid for your client during a business meeting, you probably won’t be able to deduct the cost taking your client for to a golf celebrating your new business agreement.
Penalties and fines:
in general, you may not deduct penalties and fines as a consequence of violating the the laws. So your speeding ticket is not part of your automobile expense, and that interest paid to FTB because of late tax payment is not deductible.
