Let’s Answer The Question: Is That A Tax Deduction?
We get lots of questions from clients and prospects about what expenses are tax deductions. Here’s how to determine if it is tax-deductible or not.
The IRS states that a business expense is an expense of carrying on a trade or business. To be be a tax deduction these expenses must be ordinary and necessary. Ordinary means the expense is common and accepted in your line of business. And an expense is necessary if it is helpful and appropriate for your trade or business. To be a tax deduction it must be both, ordinary and necessary.
What does ordinary mean? If an attorney wanted to write-off a pony, if would not be allowed because it does not meet the ordinary criteria. However, a petting zoo could write-off a pony because it would be considered ordinary for a petting zoo to purchase and deduct a pony.
How do we apply the term necessary? This has a much broader definition. It does not have to be absolutely necessary to qualify as a tax deduction, just necessary. It needs to be helpful and appropriate for your business. For example, you rent an office. That is a tax deduction. It is not absolutely necessary for you to rent an office because you could work out of your home, but it still qualifies because you do need a place to work and meet clients.
In determining whether business expenses are ordinary and necessary we would follow IRS code, regulations, and publications. When that is not clear, or there is no guidance, we look at court cases. When defending a deduction that could be deemed personal it is important to have court cases to back up your position. The IRS will look at previous court cases to determine if they would win or lose in tax court. You should do the same!
Common Tax Deductions
Here is a list of common tax deductions for law firms and professional service providers:
Advertising and Marketing. What you spend to promote your business is a tax deduction. This includes business cards, websites, publication ads, billboards, social media, etc.
Office Expenses and Supplies. Expenses to run your office. This includes office equipment, software, toner, pens, paper, and everything in between.
Rent. If you rent an office, you can deduct it.
Home Office. If you run your business out of your home, that is a tax deduction. You must meet two tests for this to be a tax deduction. 1) Regular and exclusive use, and 2) Principal place of business.
Retirement Plans. This is a great tax deduction that you shouldn’t miss out on. It allows you to build wealth and save on taxes. Win-win!
Travel and Lodging. Travel expenses related to your business are tax deductible. These include trips for conferences, continuing education, meeting with clients, and other business purposes. Even if part of your expense is personal related, you can still deduct the business portion.
Meals. Although the rules for deducting meals has changed in the past few years, you can still deduct 50% of these expenses if it is directly related to a business purpose. That includes meeting with a client or employee. And meals provided at office parties and events can be 100% deductible.
Insurance. The cost of insuring your property, malpractice insurance, and workers comp are all deductible expenses.
Continuing Education. The cost to stay current in your profession or to learn new material is tax deductible.
This list could go on and on but this gives you an idea of how to determine if something is tax deductible or not. When in doubt, ask your CPA!
Tax Deductions Save You Money.
We want you to be able to deduct all the tax deductions you are legally entitled to. We highly recommend having an accounting system in place that helps you track these deductions. This will help you save money on taxes, as well as run your business better because you will be able to see what you’re spending your money. Good record keeping should always help you improve your business.
Aligned CPA helps law firms and professional service businesses. We’d love to talk with you and see if we would be a good fit for your firm. Contact us for a consultation today.
I help solo and small law firms, and other service professionals, by providing accounting, tax preparation and proactive tax planning services.
I promise you, working with a CPA can be much more exciting than crunching numbers and reviewing last year’s taxes. I look at the day-to-day of your business and help you find ways to perform better, grow bigger and generate revenue with greater ease.