Business Expenses: Helpful Tips

As you complete the last few months of bookkeeping for the year, we wanted to reach out with helpful tips on business expenses.

What Can You Deduct?

According to the IRS, you must determine the business purpose of the expenses you are deducting. A business expense must be “ordinary and necessary”. Ordinary expenses include items that are commonly accepted in your business and industry. Necessary expenses include items that are helpful and appropriate for your business.

Personal & Business Expenses

Personal, living, and family expenses are usually not deductible for a business. However, if you pay for something that you use personally and also use for your business, you can deduct the business portion of that expense. Expenses that are purely personal but paid through your business should be coded to an equity account commonly named “Distributions.”

For the best tracking and separation of business and personal expenses, we recommend maintaining separate bank accounts for business and personal funds.

Common Business Expenses

Meals

• Meal expenses include meals purchased while traveling for business purposes away from home. They may also include meals you provide to your employees onsite. In the past, meals have been 50% deductible for a business. For 2021 and 2022, business meals from a restaurant are 100% deductible. Meals not purchased from a restaurant are still 50% deductible. We recommend using two separate expense accounts for meals. One should be labeled “Meals: Restaurants” and the other labeled “Meals: Other.” Separating restaurant meals from all other meals will be helpful in determining total deductible meals expense at the end of the year.
• Please note: entertainment is 100% non-deductible and should be recorded in its own account separate from meals.

Business Use of Vehicle

• If you own a vehicle used 100% for your business, you may be able to deduct expenses such as the cost (purchase price) of the vehicle, repairs, maintenance, and gas. Alternatively, you may deduct mileage at the standard mileage rate. If less than 50% of the vehicle’s use is business-related, we recommend using the mileage deduction at the standard rate.
• In order to deduct business vehicle expenses, make sure to track your mileage and vehicle expenses throughout the year, ensuring you differentiate business and personal trips. Note – there are apps you can download to your phone that can assist with this!

Business Use of Home (Home Office)

• If you use part of your home exclusively and regularly and as your principal place of business, you are able to deduct certain expenses related to the home. This deduction is available if you used a home office for the business you own, not for any time worked from home for an employer. These expenses may include mortgage interest, insurance, repairs, and utilities. These expenses will be deductible as the percentage of the home that is used for business. To best track the expenses for this deduction, we recommend adding these expenses to a spreadsheet throughout the year as you pay them.

Travel

• To deduct travel expenses, two conditions must be met. First, the travel expenses must be incurred because you were required to be away from home substantially longer than a normal workday. Second, the travel expenses must have been paid so you are able to sleep and rest in order to meet the demands of the work while you are away. If these two conditions are met, you can deduct travel expenses for your business. These expenses may include transportation, shipping, rental cars, meals, and parking.

Advertising & Marketing

• The advertising expense category is defined as activities that promote your business. Advertising includes messages or publications containing price, qualitative or comparative language, or a discussion of the value and savings being offered. Advertising is tax-deductible for your business.

Sponsorship

• According to the IRS, a sponsorship happens when a business pays for acknowledgement without expecting any major benefits in return. A common sponsorship mechanism is the display of a business logo or business name in connection with an event. Sponsorships must not directly advertise the business being sponsored. Additionally, any amounts paid in excess of the sponsorship market value could be considered charitable, and must be treated separately. It is important to distinguish between charitable and sponsorship expense, because charitable donations have deduction limitations whereas sponsorship expenses do not have the same restrictions.

Charitable Donations

• A charitable donation is a payment made to an eligible organization such as a church, charitable cause or charitable organization. Businesses may receive tax deductions for their charitable donations subject to limitations. We recommend detailed recordkeeping for your charitable giving, making sure to keep the charitable receipts for each donation in case the IRS requests more information.

Non-Deductible Expenses

Political Donations: NOT Tax Deductible

• Political donations include donations made to political candidates, political organizations, and political parties. Political donations also include amounts paid for lobbying and for political events and functions. We recommend keeping a separate account for any political donations throughout the year to keep non-deductible items separate from your deductible expenses.

Entertainment: NOT Tax Deductible

• Entertainment expenses include activities providing amusement or recreation, such as vacations, country clubs, and sports or theatre tickets. We recommend keeping a separate account for any amounts spent on entertainment throughout the year to ensure these are not inadvertently combined with other deductible expense

Recording An Expense If You Are Unsure

• If you are unsure how to categorize an expense in your business, record the expense under the “Ask My Accountant” expense account, and include the business/personal portions as well as any other detail in the memo
• Please feel free to reach out to us with any questions

Employee Spotlight

Debbie Saager

Debbie joined the Soukup, Bush and Associates team in August of 2014. She moved to Fort Collins from Littleton, Colorado where she worked for one of the large accounting firms in the administrative position. Debbie currently processes all of the accounts receivables and assists with all aspects of the administrative position as well as processing all facets of the tax returns. She feels assisting and interacting with clients is the most enjoyable and rewarding part of the admin position.

In her spare time Debbie enjoys spending time with her children, grandchildren, and husband, hiking, boating, and exploring this beautiful country.

Filling Deadlines

OCTOBER 15, 2021 – Federal and state income tax returns are due for individual taxpayers and C-Corporations if extended

2021 Estimated Payment Deadlines

January 18, 2022 – 4th quarter estimated payments for 2021 tax are due to the IRS and Colorado Department of Revenue