Are your business expenses deductible?
As entrepreneurs, every expense we incur we want to deduct. Trust me, I want to deduct everything. … clothing is a business expense right? Not necessarily...
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. So did you catch that? Has to be both ordinary and necessary. Pretty clear right? Nope, sounds like a pretty grey line. However, there are court cases and other IRS specific guidelines on the issues. For example the IRS gives very specific guidelines on if Meals and Entertainment are deductible (see here https://www.irs.gov/taxtopics/tc512.html). Best bet, talk to a CPA about your expenses. Here is a rule of thumb:
Does it benefit you personally or your business? For example, you buy year subscription to Squarespace for a website . Is this website used for business or personal? Most likely, it’s used for business. It is both an ordinary expense in pretty much every industry and it is almost always necessary for a business to have a website. So therefore it is deductible. On the other hand, let’s say you buy new clothing to look professional (us accountants have to look professional after all). Does this benefit your business or you personally? IRS would say this is a personal expense. You have to have clothes (most people wear clothes after all). Looking professional may be ordinary in your profession, but it is not necessary for you to run your business.
Does that make sense?
As always, reach out if you have any questions!
Here is the link to the IRS page on the topic: https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deducting-Business-Expenses