Every deduction lowers the profit you pay tax on. Almost all of them rest on a single test in the tax code, and once you know it, most questions about what you can write off get easier to answer.
The ordinary and necessary test
Under the tax code, a business can deduct expenses that are ordinary and necessary for its trade. Ordinary means common and accepted in your line of work. Necessary means helpful and appropriate, not that you couldn’t survive without it. Personal costs don’t qualify, even if you pay them from a business account.
Expenses owners ask about most
- Home office. A space used regularly and only for business can qualify. The simplified method allows $5 per square foot, up to 300 square feet.
- Vehicles. You can use the IRS standard mileage rate or your actual costs for the business share of driving. Either way, keep a mileage log.
- Meals. Business meals with clients or colleagues are generally 50% deductible. Entertainment, such as event tickets, is not deductible.
- Equipment. Section 179 and bonus depreciation can let you deduct the full cost of qualifying equipment in the year you buy it, rather than spreading it out over several years.
- Startup costs. You may deduct up to $5,000 of startup costs in your first year, with the rest spread over 15 years. The $5,000 shrinks once total startup costs pass $50,000.
- Health insurance. Self-employed owners can often deduct premiums for themselves and their families.
Mixed-use costs
A phone, a car or internet service often serves both business and personal life. Only the business share is deductible. Pick a reasonable way to measure that share and stick with it.
Records matter as much as the rules
If the IRS questions a deduction, you’ll need to show what you paid, when, and why it was for the business. Keep receipts, invoices and bank records, and write a short note on the purpose of meals and travel when it happens. Keeping business and personal spending in separate accounts makes all of this simpler.
When deductions meet bigger planning
How you set up the business, pay yourself and buy major equipment all affect your deductions. These choices also tie into succession and estate planning, which is where our firm focuses. For North Dakota business owners, we can review how your structure fits your long-term plans. Call us at 703-649-4848.
This article is educational and general in nature. It is not individualized legal or tax advice, and reading it does not create an attorney-client relationship. Tax law changes often, so talk with a qualified professional about your own situation.
