This article focuses on the general rules that apply to all business deductions. Nevertheless, the law states that legal fines and penalties are never deductible, so the ticket must be paid out of the salesman's own pocket. It's arguable that the cost of the ticket is an ordinary and necessary business expense.
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These include items such as lobbying expenses and political contributions, fines and penalties such as parking tickets, and illegal payments such as kick backs.įor instance, a traveling salesman who receives a speeding ticket must pay it, or risk losing his driver's license and his ability to earn a living. There are a few types of expenses that might be seen as promoting the business, but are specifically made nondeductible by the tax laws. If you can't do this, the IRS will compute your tax liability based on its view of the question under dispute. Remember, on most tax matters, the IRS can require you to prove that your deduction (or other item on your personal or business return) is correct. If you have kept good records, proving your deductions won't be a problem. This is where your recordkeeping routines come into play. In a tax audit, the IRS agent will ask you to show that the expense was in fact paid. Adequate records to substantiate the deduction.If the expense was only partly for business, you'll need to allocate it between the business and personal portion. The IRS is keenly aware that taxpayers may be tempted to write off things as business expenses that are really nondeductible personal expenses. Was the expenditure ordinary and necessary for your business? For example, purchasing copy paper is a business expense but, purchasing a photocopying machine is not a business expense. A business expense refers to the amounts paid for an item that is not expected to last more than one year. There are certain threshold issues that apply to all business deductions.īusiness expense versus capital asset. You don't want to fall into the trap of justifying the purchase of a gold-plated white elephant by saying: "So what if I really don't need it, it's deductible!"
Particularly if you are in the startup phase of your business, the money you have to spend is limited. Getting a tax deduction may be nice, but make sure that the deductible expense is justified from a business operations perspective. In the long run, there may be other ways to save even more tax dollars - such as by shifting income to other tax years and by taking advantage of tax credits - that can take a certain amount of advance planning.įor nearly every small businesses, the quest for tax savings should start with maximizing your deductions. Spending the time and energy to unearth every legitimate deduction that you can claim is usually your best bet for reducing your taxable income (and therefore your tax bill) as much as possible in the short run.
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