An Introduction to Expenses and Deductibles

During tax season, business owners are faced with questions like, “what is an expense?” and “what is a deductible?” Finding the answers to these questions can often feel more complicated than collecting all your tax forms.

At KeyLin, we want to make doing your taxes and making smart decisions for your business as easy as possible, so we put together this simple guide on deductibles and expenses. In the vein of keeping taxes simple and easy, we offer virtual accounting and bookkeeping services, including a free first consultation. Now all you need to do is find those tax forms!

What is an Expense? What is a Deductible?

Expenses are the costs associated with running your business. Deductions are specific expenses that can be removed or subtracted from your taxable income. In order to be a deductible, an expense must be both ordinary and necessary.

What Are Ordinary and Necessary Expenses?

Ordinary expenses are commonly used and widely accepted in the industry. These are the expenses that someone would expect you to have for your line of business. For example, buying notebooks so you can take notes and keep your thoughts organized is an ordinary expense, because a lot of people do it, and it’s not unique to your industry. Office furniture would also be considered ordinary, because you need a desk and chair to work at.

Necessary expenses are needed to run your business, and appropriate for the trade or industry you operate in. These are expenses that are required for your line of business. For example, if you own a construction company, buying wood is a necessary expense because it is needed to run your business, even if it is a less common expense. If you’re a photographer, though, wood wouldn’t be considered necessary, but your camera and film would be.

To be deductible, expenses must fall under both of these categories. While the exact definitions are broad, there are some things that are generally considered ordinary and necessary. Office supplies, office rent, labor costs, tax preparation, attorney fees, and advertising expenses are generally considered ordinary and necessary. Some parts of your health insurance premiums and your retirement contributions may also qualify.

What About Personal Expenses?

Some things that you use in your personal life may also be deductible, at least in part. If you have things you use both for and outside of your business, like a cell phone or laptop, the expenses associated with those things may be deductible. This one can get tricky, so we recommend checking in with your tax preparer if you have personal expenses that you think may be deductible.

It’s Complicated — Let Us Help

In order to be deductible, your business expenses must be both ordinary and necessary. That is, both expected for businesses and required in your industry. We know that classifying expenses can be complicated, but you don’t have to do it alone. KeyLin is here to help you with all your accounting and bookkeeping needs, and your first consultation is always free.

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