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A Look At Rules And Laws Of Business Deductions You Need To Know

Updated on June 15, 2013

Expenses for self-employed persons and businesses can greatly reduce the taxable income of the entity. Expenses related to business in categories like travel, meals and entertainment are al deductible to some extent and one must know the little rules that apply to each. All deductible business expenses all have the common factor or certain test to see if they are allowable. All business deductions must be considered ordinary and necessary for the type of business. The deduction must also be considered reasonable, as well as for business purposes.

The differences between the deductions are they each have secondary test that they must meet. Travel expenses must be incurred while the person is away from their tax home and must be in the pursuit of taxpayer’s trade or business. (Whittenberg and Buller, 2012) Travel expenses will include lodging, taxis, meals and laundry. Almost all of the expenses are fully deductible, with exception to meals, which are only 50% deductible. Qualifying deduction in travel would be for lodging overnight while out of town on business, whereas a fancy hotel that surpasses the federal per diem would not be deductible, or only what is considered exceptable. Meals that are connected with business meetings are also only 50% deductible. Expenses for entertainment directly before or after a business meeting occurred. An example of that a qualifying expense could be a softball game where everyone met after a dinner meeting, whereas membership fees for a country club would not be deductible.

Business expenses will be reported on Schedule C for tax purposes and tax payer’s may be tempted to try and claim illegal or non-deductible items. A deduction for a pleasure trip with the family would not be a legal deductions. The IRS is well aware of this and takes certain precautions to fight against false claims. Red flags would arise if the deduction ratio with revenue ratio is unreasonable, as well as not in mesh with other similar companies. Actual proof of expenses when not at a per diem rate should also be kept in lieu of an audit or if the IRS has any questions on the validity of the expense claims.


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