In the world of accounting, a question that frequently crosses the minds of business owners is: ”What expenses can I deduct?” This question is entirely justified because accountants seldom encounter clients who willingly want to pay more taxes than necessary. It’s crucial to understand that the deductibility of expenses directly impacts a business’s profitability, and profitability, in turn, influences the amount of taxes owed.
The Internal Revenue Service (IRS) provides a somewhat nebulous definition of deductible expenses, stating that they must be ”Necessary and Ordinary” for business operations. Let’s delve a little deeper into these terms. ”Necessary” encompasses anything indispensable for running your business, comparable to the human body’s basic needs, such as water, food, and oxygen. For instance, in a trucking business, this would encompass essentials like trucks, fuel, operational licenses, insurance, and other critical items.
On the other hand, an expense is considered ”Ordinary” if it aligns with the typical expenditures associated with your specific business type. For example, sunglasses would be an ordinary expense for a truck driver, as they are crucial for safe driving, especially on sunny days. However, something like sheep shears would not be ordinary for a truck driver but could be both ordinary and necessary for a sheep farmer.
It’s worth noting that an expense deemed necessary for personal well-being, such as medication, may not be considered necessary or ordinary for your profession. If you’re prescribed medication or require a support animal, while these are not considered business expenses, they may still be eligible for itemized deductions on your tax return.
Unfortunately, not all expenses can be claimed as deductions. Despite being a part of our daily lives, entertainment expenses are not deductible according to the rigid rules set by the IRS. So, expenses like your Netflix subscription won’t qualify for a deduction.
Travel expenses can be somewhat intricate for truck drivers due to specific criteria laid out by the IRS. To claim travel expenses, including ”food” or per diem expenses, you must have a home for which you pay expenses and travel away. There are three general criteria: 1) You must have duplicative expenses, meaning you continue to pay for your home even when you’re away. 2) . You work out of your home. For truck drivers, that always a NO because you’re an over the road driver which does NOT require
you to work out of your home 3) You haven’t abandoned your original place of residence.
Some clients have successfully included Uber expenses for travel when their trucks are stopped on business, which are deductible as long as the criteria mentioned above are met. Alternatively, a few clients have opted for bicycles as a means of travel, offering an eco-friendly and healthy alternative, weather permitting.
Understanding which expenses are deductible and adhering to IRS guidelines is vital to optimizing your business’s profitability while minimizing tax liabilities. If you have any questions or need assistance navigating these complexities, please don’t hesitate to contact our Abacus Professionals team. We are here to help you make informed financial decisions. You can reach us at exprec@abacus.cpa.
Our cash expense record is a tool you can use to track your expenses. You can find it here.
