Selecting which expenditures of a business owner are tax deductible often seems like a mystery to people who lack paid tax preparer training. But some universal standards are applicable to deducting business costs from income before calculating tax. An ability to clearly convey these measures is a path toward achieving a distinctive tax preparation career.
Business owners don’t demand a detailed explanation of tax rules, but they certainly benefit from a general understanding. This prevents them from accidentally claiming unallowable deductions. They depend upon professionals with tax preparer education to explain basic business owner tax factors. This includes advice about improvements in the compilation of expense listings and better organization of supporting documentation. A valuable addition to tax preparer duties is elucidating in plain words how business owners can understand what makes an expenditure tax-deductible.
The key IRS tax preparation characteristics governing tax-deductible business expenses are comprised of just a few metrics. These elements are worthy of constant tax return preparer review. The initial consideration involves a common sense determination of the intent for any expenditure. If the primary purpose is achievement of a business goal, then it probably is a tax deduction. Business owners should not attempt to deduct expenditures that primarily embody personal benefits and have only tangential commercial purposes.
A major implication for business deductions is the necessity of the expense. The IRS applies standards of necessity that are distinctive to particular industries. Therefore, expenses that are necessary for one type of business are not considered necessary to operations in other fields. A useful process in tax preparer work is considering whether expenses claimed by a business owner are common requirements for his specific industry.
Any business owner should arrange justification of the necessity for expenditures. Substantiation of deductions is an imperative process. Deductions that are disallowed upon audit result in additional unpaid tax plus penalties. The severity of the penalty is potentially removed for taxpayers who can show reasonable cause for claiming the deductions. For example, expenses that are incorrectly categorized by bookkeeping services are often considered a reasonable cause for tax errors. Receipts that mix both personal and business expenses for some entrepreneurs are frequently reasonable cause for mistakes.
Often overlooked in the evaluation of business expenses are the absolute amounts spent. The IRS certainly considers this an important factor because the tax code specifically disallows a deduction that is extravagant. Defining extravagance is generally made within the context of the overall financial condition for a business enterprise. Although a real estate development firm owned by Donald Trump could likely deduct a $1,000 meal to discuss a business project with a potential partner, that cost is probably not deductible for someone with a sideline as an independent contractor making only $25,000 per year.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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