I work with many business owners and by far, the most commonly asked question I get is, “Can I deduct that as a business expense?” As with all good tax law questions, it depends on a lot of factors — the type of expense, the type of business that you have and whether you can verify the purpose behind the expenses.
Here are some guidelines to help you decide whether the type of expense you want to deduct may work for your business.
Ordinary and necessary
When thinking about any business expense, I like to start with two words — ordinary and necessary. These two words are at the center of how the IRS defines a business expense. But they may not mean what you think they do.
“Ordinary” in this context means the type of expense that a business like yours would normally take. For example, it’s common and accepted for tax preparers to have to pay for software, malpractice insurance and continuing education. Because these are common and accepted in the profession, they are considered ordinary expenses.
However, this point can get very business specific. It’s not ordinary for tax preparers to deduct breast implants as a business deduction. But for entertainers at strip clubs? It’s another story. Thus my tax preparation business wouldn’t be able to deduct that expense, but a stripper at the club in the city might.
The other part of the equation is necessary. I’m still not sure why the IRS uses this particular word since in this case it means “helpful and appropriate” for your trade or business, rather than mandatory or required as one might normally think necessary means. In any case, as long as it’s helpful, you can consider it a business expense.
If your expense fits these two criteria, you are 95% of the way to deduct that expense . However, there are a couple of caveats, which I will discuss later on.