There are three simple questions you can ask to determine whether an expense is tax deductible: The first question is “Is this expense reasonable, ordinary or necessary?”
For example, it would be reasonable for a doctor to buy medical equipment. It would be ordinary for a realtor to pay for advertising. On the other hand, there are certain expenses that are not allowed: life insurance covering corporate officer, gold club memberships and breast implants, since they don’t fall into the “ordinary and reasonable” categories. Deducting a car because it has a business logo painted on it is also stretching the “reasonable” category.
The second question is, “Does it have a bona fide business purpose?”
Examples of items that have a clear business purpose include an office telephone line and electricity to keep the office lights on. On the other hand, some business purposes can be murky. One client of Tax Matters Solutions owns a heating company. This client loves to travel, and bought an $80,000 RV. “Would it be tax deductible?” he wondered. Even though he could prove his RV was reasonable expense, he couldn’t define a bona fide business purpose. As Tax Matters Solutions pointed out, he could deduct the mortgage interest on a schedule A, but he could not deduct the RV as a necessary or reasonable business expense.
The last question is, “Does everyone have this expense?” If everyone has this expense, such as food, medical insurance and clothing, then chances are you cannot deduct it.
If you are unsure about whether you can deduct an expense, call Tax Matters Solutions, where one of the partners will be happy to answer your tax-related questions.
