There is a very important reason why I say “find your hidden business deductions” instead of “turn your personal expenses into business deductions.” They may sound the same, but they are very different.
There have been tax preparers and especially guys who never prepare tax returns, but sell courses on how to avoid or evade taxes, who have said that they can show you how to turn your personal expenses into business deductions.
If your business pays you back for the fair market value of your computer and picks up the ISP cost because you use your computer and Internet in your business, that’s okay. It’s a business expense. It may have previously been a hidden business expense, and now you know about it. Still okay.
But let’s say it’s a personal expense. There is no business purpose. And now you say “Hey, I get to write off my computer and ISP now.” That won’t fly. You can’t turn a personal expense into a business expense just because you have a business. You must have a business purpose.
The key words are “ordinary” and “necessary.” If your expense is ordinary and necessary to the production of income, then generally speaking it will be deductible. Of course, you have to keep copies that prove you paid it and some kind of receipt that shows what it actually is. Some things aren’t fully deductible, such as meals, but again, generally speaking you have a legitimate deduction.
I’m never a fan of businesses buying something simply so they get a deduction. You’re trading dollars for cents in that case. For example, let’s say you spend $10,000 on something you really wouldn’t buy otherwise. You’re at a 35% tax bracket, so you’ll save $3,500 in taxes. But you just spent $10,000 for something you really didn’t care about.
The better approach is to look at where you currently spend money. If you’re new to owning a business, you probably have some undiscovered business expenses right now.
We frequently have our clients complete a “Where Does Your Money Go?” questionnaire to look at their spending for the past 3 months. Then we go through the items to determine what is deductible and what might be deductible, after we go through the legal requirements.
There is no “this is always deductible” or “this is never deductible” guideline because it depends on the business circumstances. Does the expense help your business? That’s the final test.