Anaheim Hills Accountant Answers: What IS a Business Expense?

Here’s another one of those questions I get asked a lot: Why isn’t that a business expense? Primarily because there’s a difference between what the IRS defines as a business expense and what we’d like to write off as a business expense.

Let’s start with an example. Say you’re working late on a project, and it looks like you won’t make it home for dinner. You order some food to be delivered so you can keep working. Is that a business expense? No.

No, you might ask? But you wouldn’t have had to buy that food if you weren’t working on that report for your client, XYZ Corp! True, but you were going to eat anyway, as humans need food to survive. So whether you had brought in dinner or bought it, it’s not something that was specific to the job.

For something to be a deductible expense, it needs to meet two criteria from the IRS code:

  1. Ordinary for the production of income
  2. Necessary for the production of income

I usually get a lot of confused looks when I mention this to clients. They tell me it’s vague and open to interpretation. Maybe to you, I reply, but not to the IRS. To them, it’s simple: it has to relate to your business and the production of income for your business. Always remember that you won’t be audited now, it will be a few years down the line, and the IRS auditor will have the benefit of hindsight. What will this deduction or expense look like to that auditor? It’s something to keep in mind.

Here are more examples of things my clients want to claim:

  • Haircuts: These are almost never deductible. Even if you’re a model or an actor and the client requests a specific haircut for a photo shoot or role, they almost always have staff on set to do so. That’s not to say that we recommend going to work looking like you’ve spent a month camping, just don’t try to deduct your salon bills in your tax return.
  • Dry cleaning: Yes, you bought that suit for a job interview. But have you also worn it to dinner on your anniversary? To church? To your friend’s wedding? Even if you didn’t, you potentially could have, and therefore it’s not exclusively for work. There is one exception to this rule: If you have to wear a uniform, then dry cleaning it could be deductible. In many cases, though, the employer has cleaning facilities for their staff, and therefore not a deduction.
  • Lunch: We mentioned the dinner example above, but what about lunch? You’re out on meetings and only have time to grab a quick bite at a sandwich shop. Deductible? No. Again, you need to eat whether you’re out on meetings, sitting at a desk, out on the tractor or chasing your children around the home, and therefore it is not “ordinary” or “necessary” for the production of income. Again, there’s an exception here and there are meals for the benefit of the employer. This is easiest to explain by example: A company needs staff to work on a Saturday, usually a day off. To sweeten the deal, the boss decides to treat the staffers by bringing in lunch from the local deli. Because this is keeping his employees at their desk working, this is termed a meal for the benefit of the employer, and it’s 100 percent deductible for the company.

Still confused about what you can claim and what you can’t? Are you afraid the taxman will see right through your return to the mistakes you didn’t know you made? Help is at hand— please contact Simons Accountancy now for a consultation how we can help with your tax preparation and bookkeeping. Call on (714) 637-4552 or use our online form.

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