We all wish to have as much business expenses deducted from our taxable income as possible. But the Income Tax code governs what is allowable as a deduction and what is not. However, there are many types of expenses that can fall into the grey areas of uncertainty. For these types of expenses, it is important to know what actually makes them allowable as deductions. Here are 4 key characteristics that govern whether your expenses are tax deductible or not.
1. The primary intention of the expense
One of the factors to consider in determining if your expense is deductible is its primary intent. If you made a trip to an exotic destination and there had a few drinks with some clients, you are not likely to be able to include the expenses for the trip as a deductible business expense because the intent was not primarily for business.
But if you made the trip primarily to source out new products to add to your product line, then it stands a better chance of being allowed as a deductible business expense. Still, you would need to validate the intention with documents like invoice of your purchases, correspondences with vendors etc.
2. The degree of necessity of the expense
The same expense to one business is necessary but to another is not. Every business has its own necessary expenses. If you are in the landscaping business, your purchase of the latest lawn mowing equipment would be a necessity. But it is not considered a necessity if you run a finance company.
3. The amount of the expense
This factor is often used to determine the acceptability of meals, entertainment and travel deductions. The amount of expense compared to your overall finances is taken into consideration. If the amount of expense is considered too extravagant, it lowers your chances of getting it deducted. In light of that, using up all the credit in your credit card is not a good idea.
4. The reasonable cause for making the expense deduction
If it is determined that your expenses are not deductible at the end of the audit, then you may be imposed certain penalties. You may appeal for these penalties to be removed if you can show “reasonable cause” for making the deductions. These are the reasons that caused you to make those wrong deductions such as an incompetent bookkeeper. If your reasonable cause is acceptable, your penalties may be waived.
