Starting and operating a business takes money; sometimes a lot of money.
The dollars you pay out to run your business, are called business expenses.
There is money flowing out to:
- Rent or buy space
- Pay for utilities
- Hire and pay employees
- Pay third-party vendors to help with accounting, billing, and the like.
- Pay for medical supplies, office supplies, and new equipment.
- Pay for marketing your practice so that you can grow your business.
- Pay local, state, and federal taxes.
- Pay for insurance
- Pay for continuing education.
And that’s not even a complete list of business expenses (if there is one!).
Business Expenses Depend On…
You see, the money you spend to run your business depends on your specific business, your industry, and on you.
Let me give you an example:
- Some people like to open their new business with 100% new furnishings; other accomplish the same by purchasing used items.
- Some insist on buying new equipment every other year, while others accomplish the same by leasing it.
- Some may need to lease more “upscale” space, while others will do fine leasing “average” space for their business.
My point is this. You have options when it comes to spending money on your business.
But that’s not all; there is another aspect to business expenses…
While you need to spend money to run your business, you also get to take tax deductions against those expenses. It’s what allows you to recoup some of the money you must spend to earn.
The key is knowing what is and what is not deductible and plan accordingly. It could save you from paying more than your fair share of taxes.
But let me sound a warning!
How many times have you heard: “I can deduct that”…?
Often people forget that they first must spend money to get a deduction! In other words, you have to pay a dollar before you get a 30 cent (or so) deduction against it.
Don’t ever forget that about business deductions!
Which Expenses Are Deductible?
But how do you know what’s deductible in your business, and how do you go about planning your deductions?
Before I say one more word, here’s my disclaimer…
“I am not an accountant or a tax professional. The information in this article is not tax advice, and it is your responsibility to verify the validity of the information presented.”
With this out of the way, let’s carry on.
IRS Definitions And Rules:
Here is how the Internal Revenue Service defines business expenses:
Generate a Profit
It is the cost of carrying on a trade or business if the business is operated to make a profit. With this definition, the IRS refers to the intention of making a profit, compared to starting a “Hobby Business” where there never is the intention of generating a profit.
And no, the IRS does not say a business must be profitable from the start to qualify for business deductions. However, the business must be operated with the intention to generate a profit at some point in the future.
Generally, hobbies, no matter how much they cost, do not qualify for business deductions.
The IRS looks at many factors when it decides if a business meets for-profit criteria or is a hobby. You can find all the details in IRS Publication 535.
Ordinary and necessary.
For an expense to qualify as a deduction, it must be both ordinary and necessary.
An expense is considered to be ordinary if it’s a common and accepted expense in your industry.
For example, paying for a billing service would be an ordinary business expense for healthcare. However, paying for a dog sitting service to come in and watch Fido while you’re at work, would not.
There are more rules regarding which expenses qualify for a deduction and which do not. Be sure to check with a tax professional if you have a situation that’s out of the ordinary.
Personal Vs. Business Expenses
In general, personal expenses do not qualify as business expenses. But of course, there are exceptions to every rule…
If you have a cost that is part business and part personal, you can deduct the part that is a business expense; as long as it’s ordinary and necessary.
For example, if you have a home office you use for your business it may be a deductible expense; the utilities used, and the equipment required may be deductible too.
Another example would be your car. If you use your vehicle for business and personal use, you must divide your expenses based on miles used for each.
Luckily, there are many apps today that make tracking miles a snap. Take a look at these apps to see if right for you: “MileIQ, Hurdlr, TripLog, and Quickbooks Selfemployed,” to name a few.
If you use your car exclusively for business, you may be able to deduct all car expenses.
Unfortunately, there is not one list of items that are tax deductible under all circumstances. What may be a deduction in one situation, may not be a qualified deduction in another. Again, check with your tax professional.
At the start of the article, I talked about the importance of knowing what’s deductible and to plan accordingly. What did I mean by that?
Well, it pays to know what is and what is not deductible and under what circumstances.
So, before you build out your basement with the intention to use it as a home office, check with your tax advisor to see if it would qualify.
Another example may be the purchase of new office equipment.
Let’s say it’s late in the year and you need to upgrade all computers, printers, and other electronics in your office. The upgrade will be a significant expense.
And here’s where planning enters the picture.
The question you want to ask yourself is this. “Should I purchase the equipment before year-end, or would it be better to wait until the new year.”
For simplicity sake, let’s assume you would take the full cost of the equipment as a one-time deduction…
- If you purchase now, the cost will be deducted against current year income.
- But if you wait and purchase in the new year, the expense would be applied against next year’s income.
- One choice might benefit you more than the other, depending on your current year income, vs. your next year, projected income.
And that’s what I mean by planning for deductions.
It’s worth to plan for and time more significant expenses; after all, they do translate into bigger tax deductions. And once again… be sure to check with your tax advisor.
Let us know what you think about expenses, deductions, and planning for them, leave your comment below…
By Johanna Hofmann, MBA, LAc; regular contributor to the NPBusiness blog and author of “Smart Business Planning for Clinicians.”