As a business owner, you live by the mantra “every penny counts.” When tax season approaches, you diligently collect receipts and bank statements, hoping to maximize your deductions and lower your tax bill. In your quest for savings, you’ve likely heard tips and “tricks” from fellow entrepreneurs, online forums, or that one uncle who fancies himself a tax guru.
The problem is, the world of tax deductions is filled with myths and misinformation. Acting on bad advice can, at best, cause you to miss out on legitimate savings. At worst, it can lead to a stressful and expensive IRS audit.
To help you separate fact from fiction, let’s debunk five of the most common myths about business expenses.
The Golden Rule: Is It “Ordinary and Necessary?”
Before we dive in, remember the IRS’s two golden rules for any business expense. To be deductible, it must be both:
- Ordinary: Common and accepted in your type of trade or business.
- Necessary: Helpful and appropriate for your trade or business.
An expense doesn’t have to be indispensable to be considered necessary. With that framework in mind, let’s tackle the myths.
Myth #1: “I can deduct the full cost of every meal with a client.”
The Reality: This is one of the most persistent and costly myths. While taking a client or prospect to lunch is a classic business development activity, the IRS has specific rules. Generally, you can only deduct 50% of the cost of a business meal.
To qualify, the meal can’t be lavish or extravagant, you (or an employee) must be present, and you must discuss business before, during, or shortly after the meal. While there was a temporary rule allowing a 100% deduction for meals from restaurants in 2021-2022 to help the industry, that has expired. The 50% limit is the standard you must follow now.
Myth #2: “My daily commute to the office is a business expense.”
The Reality: The drive from your home to your primary place of business is considered a personal commute, and it is not deductible. It doesn’t matter how far you live or how bad the traffic is.
What you can deduct is the mileage for business-related travel. This includes driving:
- From your office to a client’s location.
- Between two different business sites.
- To a temporary worksite away from your main office.
The one exception is if you have a qualifying home office that serves as your principal place of business. In that case, the drive from your home office to meet a client or run a business errand can become deductible.
Myth #3: “If I put a logo on my car, I can deduct all my car expenses.”
The Reality: Slapping a magnet on your door or wrapping your car in vinyl does not magically transform your personal vehicle into a 100% deductible business asset. While the cost of the logo itself is a deductible advertising expense, the car’s deduction is based strictly on business usage.
You must track your mileage meticulously. You can either use the IRS’s standard mileage rate or deduct the actual expenses (gas, insurance, repairs, depreciation) based on the percentage of miles driven for business versus personal use. A logo doesn’t change this requirement.
Myth #4: “I can write off my entire phone bill because I use it for work.”
The Reality: Unless you have a second, dedicated phone line used exclusively for your business, you cannot deduct 100% of your personal cell phone bill. The IRS requires you to allocate the expense.
If you use your personal phone for both business and personal calls, you must determine the percentage of time you use it for business and deduct that portion of your bill. For example, if you can reasonably show that 40% of your phone usage is for business, you can deduct 40% of your monthly bill. This principle also applies to your home internet service if you don’t have a dedicated business line.
Myth #5: “As long as I have a receipt, I can deduct it.”
The Reality: A receipt is proof of a transaction, not an automatic ticket for a deduction. The expense itself must still pass the “ordinary and necessary” test.
You can have a perfectly valid receipt for a new television, but if you can’t prove it’s a necessary expense for your business (e.g., for a conference room or to display marketing materials), it’s not deductible. A receipt is crucial for substantiating your legitimate business expenses, but it cannot make a personal expense a business one.
Navigating the tax code can feel like walking through a minefield. It’s complex, and the rules are constantly evolving. While being an informed business owner is important, you don’t have to be a tax expert—that’s what we’re here for.
At Kohani & Associates, our job is to help you move past the myths and build a solid, compliant financial strategy. We ensure you take advantage of every deduction you are legally entitled to, all while keeping the accurate records you need to feel secure.
If you’re ready to gain clarity and confidence in your business finances, contact us for a consultation. Let’s make sure your next tax season is your best one yet.thumb_upthumb_down