What is tax deductible for small business?

April 15, 2011
A woman fills out an income tax form in New York. REUTERS/Mike Segar

A woman fills out an income tax form in New York. REUTERS/Mike Segar

— Stephanie Rabiner is a contributor to FindLaw’s Free Enterprise blog. FindLaw is a Thomson Reuters publication. This article originally appeared here. —

There is no definite answer for those of you who wish to know just what is tax deductible for a small business.

According to the painfully dry tax code, a business may deduct all expenses that are ordinary, necessary and reasonable.

Just what does that mean? Think about expenses that are helpful, appropriate and common in your line of work. Oh, and they can’t make you laugh.

Internal Revenue Service Code section 162 provides a list of what is tax deductible — including travel, meal and entertainment expenses — under the ordinary and necessary clause. It, however, is not exhaustive, leaving many expenses to your interpretation.

If you have a business expense not covered, you need to ask yourself whether it’s ordinary and necessary. Consider whether it’s directly related to your business or an expense common in your trade. Also think about whether it helps your business make a profit and continue operating.

If you’re unsure, try what is known as the “laugh test” — can you put the expense down without laughing at yourself?

Or, in other terms, if you have a hard time justifying an expense or demonstrating that it actually helps or is required of your business, it probably isn’t ordinary and necessary.

The IRS also has specific guidelines on what is not a deductible business expense.

These include illegal payments, some lobbying expenses, fines and penalties (including traffic tickets). You also can’t deduct the first telephone line in your home, or your business attire, unless it’s special uniform.

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