9 Business Tax Deductions to Take with Caution
As a business owner, you may take all legitimate business expenses as tax deductions, to reduce your business tax. But some business tax deductions are easier to figure out than others.
For example, taking a deduction for the cost of supplies is pretty straightforward, and deducting, and interest on business purchases is pretty easy to calculate.
Some Tricky Business Tax Expenses to Deduct
But for other business expenses, it's not easy to figure out what's deductible and what's not.
Hence, this list of 7 business expenses that you should be cautious about taking. This is not to say that they are not legitimate business expenses, but these expenses are on this list because the deduction might be limited, or an audit trigger, or just complicated to calculate.
Proving Deductions for Business Expenses
First, a general caveat for business owners: The most common way the IRS gets business tax payers at audit is for not having the documents to prove deductions. Make sure you have the business records you need.
Here's the list of business tax deductions to take with caution:
1. Business Driving Expenses
Deducting expenses for use of your car or a company car for business driving is both complicated and an audit red flag.
First, to deduct expenses for business use of your car, you must drive at least 50% of the time for business purposes. Then, you MUST be able to show excellent at-the-time records to prove the business purpose for all business driving expenses, whether you take the standard mileage expenses or actual expenses.
2. Home Business Space Deductions
The IRS looks carefully at attempts to claim a deduction for a home business space. In particular, the IRS wants to be sure the space is being used ONLY for business purposes. Even a once-a-year personal use can negate the deduction. Second, be careful to deduct only the actual amount of space used for the business and make sure you have nothing personal in that space.
The IRS can come to your home and check.
3. Employee Gifts, Bonuses, and Awards
This one sounds like a no-brainer - all types of employee gifts, awards, and bonuses should be deductible to you - rewarding employees is certainly an allowable business expense. But there are limits on some of these items (gifts, for example, must be small), and you also have to consider that some of these (bonuses, for example) are taxable to the employee. Lots of things to think about before you run out and buy something for employees.
4. Dues to Clubs and Organizations
Business owners should be able to join clubs to network and for interaction with other businesses in similar professions. But not all club dues are deductible - forget the golf club, for example, even if you do business while you're on the course. And some club dues and expenses are strictly forbidden, like political organizations.
5. Business Travel Expenses
Like expenses for business driving, business travel expenses are both limited in amount and restricted. Can you deduct the cost of taking your spouse on a business trip? It depends on several factors. Can you deduct the cost of travel from home? What about travel overseas? Yes, it's complicated.
6. Meals and Entertainment
It's been a long time since meals and entertainment expenses were completely deductible. Now, you are limited to 50% of allowable expenses. And what about entertainment for promotional purposes? (That happens to be deductible, if you can figure out what "promotional" means). And some entertainment expenses are deductible, while some are not.
7. Depreciation on Business Assets
This is probably the most complicated business tax deduction. The laws keep changing and limits and restrictions on accelerated depreciation change each year. Now, as a result of the PATH Act of 2015, the amounts for Section 179 deductions and bonus depreciation have somewhat stabilized. That means you and your tax professional can do some tax planning. But you'll need the help of someone who is familiar with the details of depreciation; it's tricky, believe me.
8. Donations to Charity
Corporations can deduct donations to charities. For all other business types, charitable donations are deductible only through your personal tax return.
9 . Purchase of a Computer
Computers are legitimate business purchases but they have two issues: (1) A laptop computer is considered as listed property, and you must keep good records to justify business use. (2) A computer is also considered a capital asset and its cost may be depreciated over time. A portion of the cost may be deducted each year.
The information in this article is not intended to be tax or legal advice. Taxes and regulations change frequently, and every business situation is unique. Discuss possible tax deductions with your tax professional.