Fortunately for small business owners, you may be allowed to deduct legitimate business expenses (even before startup) as long as the expenses are ONR, or RON, or NOR. You decide the initialism as long as it means “Ordinary, Reasonable and Necessary”.
Remember last week, in Deep in the Heart of Taxes? I briefly mentioned that not all of the IRS’s tax laws are there to take your money – some are written to let you deduct the cost of doing business from your taxable amount. In our capitalist society, they (maybe unfairly) don’t make it incredibly easy for you to do so. When you go to file your Schedule C tax form “Profit or Loss from Business” you only find about 20 broad expense categories to list your deductible expenses. You are correctly thinking that there surely must be more things to deduct! But first, let’s take a look how the IRS broadly defines a business expense deduction.
This term is probably better defined as a business expense deduction but we all know it for what it is. A tax deduction to lower your taxes. For that reason, we’ll continue to call a spade a spade. Deductions must meet all three of the following criteria:
An expense that is common and accepted in your industry. This doesn’t mean that one time expenses don’t count. However, it would be tough to argue a cabinet installer’s work vehicle write-off of their new Ferrari as ordinary. Ordinary would probably be the 20 foot box van used by their peers.
A necessary expense is appropriate and helpful in developing and maintaining your trade or business. For me, writing off the expense of raumfurniture.com could be considered necessary as it’s the framework of my sales platform. It’s prudent to note that most of us use the word “necessary” interchangeable with “required”. The IRS disagrees. It’s not necessary that you drive that Ferrari when a Ford truck will do. It’s also not necessary for you to have air conditioning in your office supply warehouse.
The IRS says our deductible expenses must not be lavish or extravagant under the circumstances. As a very small business owner this can be tough. Capital is low, sales are lower and it may be tempting to write off a designer set of office furniture so that you can impress visitors. Sure, some companies spend way more, but they have the means to do so that help the situation not seem so “extravagant”.
Even if you don’t see your expenses in the twenty or so rows available on your Schedule C tax form, as long as it meets the basic rules it probably qualifies as a tax deduction. Fortunately there are guides available to help us determine ways to reduce our taxable income. My go-to guidebook is 475 Tax Deductions for Businesses and Self-Employed Individuals.
The book is a great resource and is also tax deductible!
Keep track of those expenses and be smart about itemizing your tax deductions. As you can imagine, there a lots of things that don’t qualify- meals at work, commuting, penalty fees and more. If you’re unsure, ask your tax accountant or lawyer. As always, thanks for reading and spread the word to your friends and family that have a small business. After all – the September 15th third installment of estimated income and self-employment tax is just around the corner!