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What Can I Deduct as a Business Expense: Separating Fact From Fiction

With so much conflicting information out there, it’s easy to be confused about what you can and can’t deduct on your taxes. So we want to help set the record straight.


From home office deductions to business travel and everything in between, we’re here to debunk some of the most common tax myths so you can maximize your deductions without worrying about raising red flags with the IRS. Let’s dive in!


Myth #1: Claiming the home office deduction will raise a flag with the IRS

You might hear people say you should avoid certain deductions because they could trigger an audit later. To clarify, the IRS is focused on detecting fraud, so you’re fully entitled to claim legitimate deductions.


To qualify for the home office deduction, your space must be used both exclusively and regularly for business. If you meet these criteria and accurately allocate a percentage of expenses like internet, utilities, and other home-related costs, you should absolutely take the deduction.


Don’t miss out due to the myth that the IRS will scrutinize you for it. As long as you can support your deduction with proper documentation, you’re in the clear. Be sure to provide all the necessary details to your tax preparer so they can apply it correctly and help lower your tax burden.


Myth #2: If you lose money for enough years, the IRS will classify you as a hobby.

That’s not entirely accurate. The key reason you don’t want your business to be classified as a hobby is that you can’t deduct all of your expenses.


In a legitimate business, even if you spend more than you earn, you can claim a loss, but this isn’t allowed for hobbies.


To avoid being classified as a hobby, you need to demonstrate that you are genuinely trying to make a profit. Lack of profitability doesn’t mean you aren’t running a business. You can show intent by having a business website, tracking proposals, or documenting client interactions. If the IRS questions repeated losses, you’ll need to prove your business intent with evidence like a business plan, an EIN, and a separate business bank account to establish that you’re operating a real business.


Myth #3: Every Meal With a Client is Deductible

There’s a common misconception that simply mentioning work during a meal makes it automatically deductible. The IRS doesn’t know the specifics of your conversation, but what matters is the intent behind the meeting. For the meal to qualify as a deduction, it must be directly tied to your business—such as meeting with a colleague, potential client, or business partner. It’s important to have documentation like calendar invites to show how the meal relates to your business.


Don’t assume that having brunch with a friend and casually mentioning your business makes it a deductible expense. If a significant portion of your expenses are meals, it could raise a red flag with the IRS, leading them to investigate why so much is being spent on dining.


Myth #4: All Business Travel Expenses are Fully Deductible

There’s also a common misconception when it comes to travel expenses for business. While it’s true that business-related travel expenses can be deducted—like flights, lodging, and conference fees—this only applies to the portion of the trip that is strictly for business.


For example, if you attend a three-day conference in Hawaii, you can deduct the expenses related to those three days. However, if you extend your stay for personal reasons, only the business-related portion is deductible.


Make sure to track and verify the business activities and expenses for the trip. Submit the details to your tax preparer, specifying the business portion of your travel, so that you can accurately claim the deduction without overstepping what’s allowed.


Myth #5: You Can Deduct Clothing as a Business Expense

When it comes to deducting clothing and accessories, the IRS allows deductions for items that are clearly for business use—typically those that are branded or have a logo, making it obvious that they are tied to your business. For example, if you have uniforms with a company logo or branded apparel worn during client-facing activities, those would be deductible.


However, regular clothing that can be worn outside of work, even if purchased for business purposes, is generally not deductible. The key is that the clothing must serve a specific business function and not be something you’d wear in everyday life.


Myth #5: Buying a Car in Your Business Name Automatically Makes It Deductible

There’s a common misconception that purchasing a vehicle in your business name automatically qualifies it for a tax deduction. This is not the case. If you buy a car under your business name but never use it for business purposes—such as when you work from home and don’t accumulate any business mileage—then that expense is not deductible.


It’s crucial to remember that simply acquiring an item in the business’s name does not guarantee that it can be deducted.


Similarly, when you pay for expenses using business credit cards, it’s essential to clearly identify what those expenses are for. Only items that are valid deductible expenses can be deducted. You want to avoid double counting or mistakenly deducting non-allowable expenses.


Should the IRS review your accounts or conduct an audit, you must be able to provide documentation justifying your claimed deductions. Failing to do so could result in penalties, interest, and the obligation to pay any back taxes owed.


The main rule around deductible expenses is that they are ordinary and necessary. Ordinary means that they are typical in your industry, other peers or people that do the same thing that you do are incurring the same types of expenses and necessary, mean that they are helpful for you to do your work.


If you ever are in a gray area of whether or not this is a deductible expense, you want to make sure that you have all of the paperwork support and backup documentation, so that if you're asked about it down the line, whether by your accountant or tax preparer or by the IRS, if they send you a letter, you've already got support for what's going on.


 

👋🏾 We’re Little Fish Accounting, a firm that goes beyond the numbers to provide concierge-level care. Our advisory services enables our clients to make strategic decisions for their business, achieving big results with small teams. Interested in learning more? Check out our suite of service offerings.


We also have a podcast, Build to Enough, where we explore practices for sustainably building a business that is aligned with your purpose and values. Let us help you to redefine what success looks like. For more, check out our services below.


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