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Federal Income Tax Business Deductions

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What Is a Business Deduction?

As statutorily defined, a business deduction is a deduction that is an ordinary and necessary expense paid or incurred in carrying on any trade or business. This typically means that one may deduct any reasonable and helpful business expense which they have incurred within the last tax year.

What Types of Things Are NOT Business Deductions?

Many things aren't business deductions. The following are not business deductions:

  • Personal expenses are not deductible. The gas you put in your car to get to work, and even the car you use to get to work are not deductible (unless it is also used for business reasons as well). On the other hand, traveling from work to a meeting for business purposes are a business expense and would be deductible.
  • Lavish and extravagant expenses incurred in businesses are not deductible. For example, deductions for entertainment expenses are capped at 50% of the expenses.
  • Capital improvements are not deductible. Investments or anything that could expand profits are not deductible.

What Types of Things Are Deductible Business Expenses?

Courts have generally tried to apply the "business deduction" terminology as broadly as possible. A few of the most common business deductions taken by most business taxpayers are the reasonable salary deduction, the travel away from home deduction, the necessary rent deduction, and the expenses for education deduction.

What Limitations Are there on the Reasonable Salary Deduction?

In general, a business owner may pay his employees reasonable salaries for the work they perform and deduct that amount from his gross income. The IRS only becomes suspicious of a salary deduction a business owner takes when the salary is disproportionate to the job being performed. A court will look at incomes for similar jobs in similar industries in making its reasonable salary analysis.

What Are the Limitations to the Travel away from Home Deduction?

The IRS limits this deduction to travels that truly are away from home. One must actually be at lease 50 miles from his primary place of business and one must be gone for a period of time that would require sleep or rest. Lodgings for business travel are generally 100% deductible, and meals from business travel are generally 50% deductible. Note: Meal deductions are closely scrutinized and highly regulated by the IRS as over the years many taxpayers have taken liberties with this provision of the tax code.

What Restrictions Are There on the Expenses for Education Deduction?

In general, education expenses that are necessary, practical, and smart in keeping up with one's profession are deductible business expenses. The IRS generally does not allow one to deduct educational expenses incurred in educating themselves about a totally new career or field, but does allow deductions that allow one to continue, improve, or maintain their place in a particular profession.

Note that you must already be in the profession to qualify for the deduction. A nurse or medical student cannot deduct tuition for medical school merely because the nurse or medical student is in a medical profession. Becoming a doctor after being a nurse or medical student would be considered a new career.

Are There Any Other Expenses That Can Be Deducted?

Of course! Other than the expenses listed above, businesses can also deduct expenses for:

  • Uniforms – Must not be adaptable for general use.
  • Advertising – Must not be a capital improvement or political contribution.
  • Dues – Must be directly related to business.

Should I Contact a Lawyer Regarding my Federal Income Tax Issue?

With the plethora of tax software out there, most people are capable of doing their taxes on their own. More sophisticated and more complex tax returns (i.e. those done by business owners) may require more time and perhaps the advice of a tax lawyer. Additionally, should you have a dispute with the taxing authority you may need to go to court, and then a lawyer may be required.

Photo of page author Jason Cheung

, LegalMatch Legal Columnist

Last Modified: 10-24-2014 10:44 AM PDT

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