Question of the Week
Can I deduct that as a business expense?
Happy Friday all!
It’s been a big week for politics in the news, including the bombshell NY Times story about President Trump’s tax returns. The Times got data extending over two decades, which showed that he paid $750 in federal income taxes the year he won the Presidency and another $750 in his first year in the White House. The data also showed struggling properties, hundreds of millions in debt coming due, an audit battle, and vast write offs.
I’ve heard from several of you intrigued by the write offs, which include $70,000 for his own haircuts, $95,000 for his daughter Ivanka’s hair stylist, $197,000 in landscaping, and a $21.1M charitable deduction. This information coming to light is likely to make trouble for President Trump, long after the election.
The revelation is also an important reminder for you businesses owners to take heed of what you can and cannot deduct as a business expenses. By far, the most commonly asked question I get from business owners is, “Can I deduct that as a business expenses?” 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’re trying 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 dancers 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.
Quote of the Week
“We have always known that heedless self interest was bad morals, we now know that it is bad economics.” – Franklin Delano Roosevelt
Task of the Week
A couple of tasks this week.
First, I highly recommend reading the NY Times article if you haven’t seen it. The Washington Post also offered an interesting analysis on what past Presidents have paid in taxes, their first year in office.
Secondly, take a look at Joe Biden and Kamala Harris’ tax returns. They released their returns soon after the article came out, and I find it really interesting to parse through their information as well.
Let me know what you think in the links below.