Common question – what are business expenses? And how do you define them as opposed to personal expenses? If you’re the business owner, they’re the same thing, right?
Not so much. Let’s unpack them.
Business expenses are incurred by the business in the expectation of earning more money. They are called “normal and ordinary” in that expenses for one business will not be the same as another business. By way of example, my accounting company is a service based, information company, so our expenses are marketing, labor, office space, and software. However, steel toed boots are not normal and ordinary costs of running an accounting company, so I can’t deduct them, even if I was inclined to wear them. However, a construction company will have different costs – including steel toed boots.
Normal and ordinary includes such items as employee wages, salaries, and payroll taxes; rent or mortgage interest on office space; advertising and marketing costs; travel costs for client meetings or conferences; legal fees related to business; accounting and bookkeeping fees, and so forth. If it’s something you need to run your business on a day to day business is usually deductible.
Now, not all business expenses are deductible on your tax returns. My expenses in getting my degrees, for example, are not deductible (although continuing education might be). Fines and penalties are not deductible, although the legal fee spent fighting them is deductible. The government does not allow you to write off funds spent in bad behavior, which includes not only fines and penalties, but also expenses incurred in illegal activities.
The government wants that illegal income declared, though. So if you happen to be dealing in illegal drugs, you are supposed to claim that income on your tax return but you can’t claim any deductions related to it. Remember, Al Capone went to jail for tax evasion, not for selling bootleg alcohol during prohibition.
What about personal expenses? Ah, that’s one that dings so many small business owners. Personal expenses are not considered business expenses. These include (and I’ve seen all of these personally) escort services or adult websites for contractors working away from home, everyday clothing (purchasing clothes while at a conference does not make it tax deductible), groceries for home, vacations or entertainment (except in certain limited circumstances), child care, medical expenses other than covered by workers comp, and so forth.
Personal expenses are best kept separate from business expenses to avoid commingling the funds and to avoid audit risks.
Donna Harris holds a BSci in Accounting and an MBA and is the owner of Bookkeeping Made Simple. She is currently pursuing her Master of Accounting and expects to complete that in December, 2023.
Donna Harris, BSci Accounting, MBA, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her master's in Accounting.