A business expensing primer
Knowing whether you can or can't expense a purchase for business purposes can be complicated. That's why there are a few hard and fast rules to help you make the best decisions.
According to the IRS, business expenses must be ordinary and necessary to be deductible. That means they are common and accepted in your business, as well as helpful and appropriate. You'll need to maintain records (such as journals and ledgers) and supporting documents (e.g., receipts, invoices) to substantiate your deductions. Certain expenses are subject to extra requirements, as described below.
Travel expenses pertain to business trips and can include transportation to and from: your destination, airports, your hotel and business meeting places. They also generally include lodging, meals, tips and other related incidentals.
- Maintain trip logs describing your business expenses and the purpose of each. If your trip is mostly for business but includes personal components, separate them in your log. These nondeductible personal items could include extending your stay for a vacation or taking personal side trips.
- Deduct travel-related meal costs, but only up to the 50 percent are allowed by the IRS.
- Rely on estimates to determine the business vs. personal components of your expenses.
- Deduct any of your travel expenses if your trip is primarily for personal purposes.
- Deduct any of your meal costs if they could be considered unreasonably "lavish or extravagant."
Entertainment expenses need to be either directly related to or associated with the conduct of your business. That means that business is the main purpose of the activities and it's highly likely you'll get income or future business benefits. Expenses from entertainment that isn't considered directly related might still be deductible if they are associated with your business and happen right before or after an important business discussion.
- Keep records of entertainment expenses, including clear descriptions of the nature, dates and times of the pertinent business activities or discussions.
- Deduct only up to 50 percent of entertainment expenses, as allowed by the IRS.
- Claim the costs of pleasure boat outings or entertainment facilities (e.g., hunting lodges).
Business use of your personal car is calculated according to your actual business-related expenses, or by multiplying your business mileage by the prescribed IRS rate (53.5 cents per mile in 2017). This is called the standard mileage rate.
- Log odometer readings for each business trip and record your business purpose.
- Claim actual basis deductions by applying the ratio of your business-to-total mileage.
- Claim mileage or expenses pertaining to commuting to and from work.