Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier Accounting LLP based in Denver, Colorado!
Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier Accounting LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.
The last month has been much busier than I had anticipated, which a good thing is, of course. I have been fortunate to work on some great client projects over the past few weeks, which effectively eliminated any post tax-season lull for our firm. This does mean that my blog has suffered some neglect, so I appreciate my readers’ patience. I know you have all breathlessly anticipated a new tax blog, and the wait is finally over.
Our firm loves its new home in Downtown Denver! The shortened commute is a blessing to Dennis and I, and we have been thrilled to expand our service area into south Denver. We have participated in several fantastic events with the Denver Metro Chamber of Commerce, including the Colorado Business Marketplace in late May. We thoroughly enjoyed interacting with so many individuals in the Denver business community and building on those introductions in the last few weeks. We are also excited to be new members of the Downtown Denver Partnership. We look forward to the opportunity to invest in the development of small business interests in our area.
This week, I am blogging from my home state of Texas. My sister is getting married in Austin this Saturday, and I flew in early to help with the festivities. Most of my day today will involve making runs to Target and picking up incoming family members at the airport. I did, however, find a few quiet moments to get to my new post, so without further ado…
For this week’s tax installment, I want to touch on the idea of expenses deductions for small business owners – what is and is not deductible?
For many, this is a true art form and an opportunity to turn as many essentially personal expenses into tax deductions as possible. We all seem to know someone who is clearly too aggressive in the expenses they are claiming for their “business” (i.e. that two week trip to Aruba with their wife). On the other hand, I find that many of my small business clients are a little too shy in claiming deductible expenses, worried to look as if they are abusing the system like Mr. Aruba above.
While I would never encourage a client to deduct an expense that I wouldn’t feel comfortable putting on my own return, I do encourage clients not to be shy in tracking their expenses. The IRS is not shy in the least about the tax burden levied on small business owners in the form of self-employment tax. One of the primary tax benefits of being a business owner is the opportunity to deduct the expenses you incur in operating your business to reduce this burden. Therefore, it is essential to strike a balance between being too aggressive and too passive in the tax deduction game.
So what expenses can you deduct? The IRS allows deductions for “ordinary and necessary business expenses.” In the broadest terms, this means that if someone else in your line of work would consider it a legitimate cost of doing business in your industry, then it is likely a deductible expense.
There are a few things that are specifically disallowed for deductions:
Lobbying Expenses – Any expenses related to lobbying a public office are disallowed for most businesses. You may think this doesn’t apply to you, but if you are a member of any organization, such as the Chamber of Commerce, you should check your membership invoice for an indication of what, if any, percentage goes to lobbying. This portion of your dues would be disallowed.
Fines & Penalties – You might be inclined to think that the speeding ticket you received in route to that client meeting is an ordinary and necessary business expense. Or the parking tickets you’ve accumulated downtown. Sorry to be a bummer, but any type of fine or penalty is disallowed as a deduction. This would include any type of late penalty paid on renewing professional licenses and fines you receive for failing to comply with other regulations.
One-Half of Meals & Entertainment – Most people know that you can only take one-half of your meals and entertainment expenses as business deductions. Since these expenses are so ripe for abuse, the IRS ensures that you do not receive the same benefit for these expenses as other business expenses.
There are other expenses that fall into a somewhat grey area. Here are some of these questions that I received on a regular basis:
Can I Deduct My Professional Wardrobe Expenses? What about My Dry Cleaning?
I have heard people answer this question differently, but my answer is No and No unless you are required to wear a specific outfit (i.e. uniform) for your business. The necessity to look professional on the job doesn’t make it a business expense. Clothing is an inherently personal matter (i.e. you would be wearing clothes regardless of your job…ideally) so unless you are restricted to wearing something you would never otherwise purchase (for instance, a chicken costume), then it is probably not deductible.
What Part of My Travel Expenses Are Deductible?
It is not unusual to have travel expenses for a trip that is both business and personal. For instance, if you go to a conference in New York that lasts three days and you stay over for another two days for some sightseeing, how much of that trip can you deduct?
If the “primary purpose” of the trip is business, then 100% of your airfare is deductible. If, however, you brought your spouse and they are not there on business purpose, then their airfare is not deductible. You can deduct lodging for the nights you are on business, so in my example, the first three nights’ hotel is deductible.
Can I Deduct Wellness Expenses Related to My Job?
Many business owners will ask something along these lines: “My business causes me a lot of stress. Can I deduct a weekly or monthly massage as a business expense?” Again, the answer is likely no. The same goes for getting your haircut, your nails done, or anything else that is an inherently personal expense. Would you need to get your haircut regardless of running your business? Since the answer is yes, it doesn’t qualify as a business expense.
These examples have obviously just scratched the surface on the wilderness of business deductions. For the most part, it is common sense – was this expense for business or wasn?t it? When in doubt, I tell my clients to keep track of it and ask me about it come tax time. If I don’t feel it is a sustainable deduction, then I will inform them.
If you have any additional questions like those above regarding the general deductibility of business expenses, please email me at email@example.com. Maybe I will do a follow-up blog post on this topic to cover more on the subject than I could fit in one post.
Thank you again for checking in with us at Lanphier Accounting LLP!
Lanphier Accounting LLP
600 17th St., Suite 2800 South
Denver, CO 80202