Deductible or Not?
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Taxes for the Self-Employed
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The financial costs of running your own business are certainly much greater than those for an employee who works for someone else. Luckily for the small business owner, many of these expenses can be claimed as deductions on federal income taxes – within limits, of course.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
Much of the “ordinary and necessary” test can be satisfied by documentation of what you’re claiming and what your business is. For example, a concrete finishing contractor might have a tough time justifying satellite TV service as an ordinary and necessary expense for his business; but if he was in advertising, that could be a different situation.
Deductible Expenses
Here’s a list of the most common deductions:
- Employee fringe benefits
- Interest
- Legal, tax preparation, and professional fees
- Rent expense
Not all these deductions can be taken in their entirety. Most carry limits on their deductible amounts, and other restrictions may also apply.