The old adage, "it takes money to make money" goes by another name--the cost of doing business. Generating revenue requires spending money for materials, labor, advertising, and so forth. What's left is profit--the amount that small business owners always hope to maximize.
For the most part, the tax rules governing business expenses are pretty straightforward.
An expense may be deductible if it is both "ordinary" (common and accepted in your field of business) and "necessary" (helpful and appropriate for your business). Here are a few examples:
This is an easy one. Pens, pencils, paper, envelopes, copier toner, printer ink all qualify as a deduction.
- Office Equipment and Furniture
These are deductible if they're used exclusively for your business. But here you have a choice. You can either deduct the entire amount in the tax year they're purchased, or deduct a portion of the expense over several years by calculating the depreciated value. This is known as a Section 179 deduction (for defining portion of the IRS Tax Code), and also covers off-the-shelf software, business vehicles, property, and other qualifying items.
This is an important deduction, particularly home-based entrepreneurs. Be sure to keep a detailed record book of business-specific mileage, including date, destination, purpose, and miles traveled, especially if you use the vehicle for personal trips. Most small business owners figure the deduction by multiplying the total business miles by the IRS mileage rate. (Note that this rate often changes during the year). Also be sure to log and keep receipts for tolls, parking fees, and transit.
- Your Travel
When you hit the road for business, more deductions are available. Things like lodging, cabs, air or train fare, dry cleaning, etc. The key is the purpose of the trip. If it is entirely for business, then these expenses are 100% deductible. If the trip mixes in personal activities or vacation time, then you can only deduct a proportion of those expenses (e.g., one day of business meetings during a five-day trip = 20%).
While you're on the road, you may deduct 50% of your meal costs. Meals around home don't count, unless you're meeting with a client or current / potential business partner to talk business. Then the 50% deduction applies.
These are just a few of the common deductions one can take for business. So what are some of the most unusual cases where the IRS approved certain expenses because of the cost of doing business? According to the website efile.com, they posted some unusual business deductions that were approved by the IRS, such as these listed below:
Can clarinet lessons be a deduction?
A parent was able to deduct the expenses for clarinet lessons for her child because she claimed it corrected her child’s overbite. This was based on a 1962 case where an orthodontist argued that playing the clarinet helps correct a child's overbite.
Is cat food deductible?
Yes, under certain conditions the cost cat food might be considered a legitimate deductible expense. A junkyard owner bought cat food to attract local stray cats in order to drive away mice and rats. He claimed it as a business expense, and it was approved by the IRS. The average house cat will likely not qualify because the cat would need to perform some task associated with the upkeep of a business.
Can whaling boat repairs be claimed as a deduction?
Whaling boats need repairs and, since 2004, captains of whaling boats can deduct up to $10,000 for repairs, equipment purchases, and other expenses associated with the business. However, starting a whaling business to claim a deduction will not work for most people, since whaling is banned by the United States government and only Native American tribes are allowed to engage in it.
Interesting cases to ponder:
A man was arrested for drunk driving after he waited to sober up--but not for long enough--and wrecked his car. His insurance company refused to compensate him for the wrecked car because he broke the law. The driver, however, was able to deduct the cost of his car as a casualty loss because he acted reasonably. If he hadn't waited to sober up, then it would have been gross negligence and thus nondeductible.
A dentist submitted fraudulent insurance claims. When the fraud was discovered, she was ordered to pay the money back as well as serve some time in jail. However, she was able to deduct her repayment to the insurance company as a business expense. That is because the repayment was done to compensate for a loss sustained by the insurance company and was not considered a fine.
Many other "ordinary" and "necessary" business costs qualify as deductions. They include business-related classes, seminars, and conference fees; employees' pay; rent; interest; repairs; retirement plans; and others. IRS Publication 535 (Business Expenses) has complete explanations of all types of deductions, and when they may be applied.