When you’re filing your tax returns, what expenses can you deduct from business income? It’s a complex question. To start with, a business expense must be both ordinary and necessary to be deductible, according to the IRS. An ordinary expense is one that’s common and accepted in your trade or business.

A necessary expense is one that’s helpful and appropriate for your trade or business; it doesn’t always mean an indispensable cost. Since only business expenses are deductible, they must be separated from other types of expenses: those that are included in the cost of goods sold, capital expenses and personal expenses.

The cost of goods sold is figured by valuing inventory at the beginning and end of each tax year. The total value is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

Such expenses as the cost of products or raw materials, freight, storage, and direct labor costs including contributions to pensions or annuities for workers who produce the products and factory overhead all go into figuring the cost of goods sold.

You must capitalize some costs rather than deduct them. These costs, part of your investment in your business, are called capital expenses and are considered assets in your business. Generally, there are three types of costs that you should capitalize:

• Startup costs.
• Assets.
• Improvements.

Note that you can decide to deduct or amortize some business startup costs.

You cannot deduct personal, living or family expenses. But if you have an expense for something used partly for business and partly for personal purposes, divide the total cost between the business and personal parts and then deduct the business part.

What if you use part of your home for business? You may be able to deduct expenses for the business use of your home. These may include mortgage interest, insurance, utilities, repairs and depreciation. If you use your car for your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Other common business expenses include:

• Employees’ pay — You can generally deduct the pay you give your employees for services they perform within your business.
• Retirement plans — Retirement plans are savings plans offering tax advantages to set aside money for your and your employees’ retirement funds.
• Rent expenses — Rent is any amount you pay for the use of property you don’t own. You can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in the title to the property, the rent is not deductible.
• Interest — Business interest expense is an amount charged for the use of money you borrowed for business activities.
• Taxes — You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
• Insurance — Generally, you can deduct the ordinary and necessary cost of insurance as a business expense if it’s for your trade, business or profession.

This is just an introduction to a technical topic. Be sure to work closely with a qualified tax professional.  

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Many changes have occurred with regard to meal and entertainment deductibility since the Tax Cuts and Jobs Act of 2017 (TCJA) and continuing with the Consolidated Appropriations Act of 2021 (CAA) signed into law on December 27, 2020.

In an effort to help the struggling restaurant industry during the COVID-19 pandemic, changes were made to allow a 100% deduction for business meal expenses incurred after December 31, 2020 through December 31, 2022. If meals are not provided by a restaurant, the deduction is still limited to 50%. On April 8, 2021, the IRS issued Notice 2021-25 to provide further guidance that a restaurant does not include businesses that primarily sell pre-packaged food or beverages not for immediate consumption.

On November 16, 2021, the IRS issued Notice 2021-63 to indicate that a taxpayer that properly applies the rules of Rev. Proc. 2019-48 may treat the meal portion of a per diem rate or allowance as being attributable to food or beverages provided by a restaurant.

What is Per Diem and how do we apply Rev. Proc. 2019-48?

A per diem allowance is an amount a business pays for lodging, meals, and incidental expenses incurred when traveling. The allowance is in lieu of paying employees for actual travel expenses.

The amount of expenses considered substantiated for each calendar day equals the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate for the relevant location set by the U.S. General Services Administration.

No receipts are required to substantiate the deduction as long the employee provides the time, place, and business purpose of the travel for that day.

If the per diem allowance is only for meals and incidental expenses (i.e., there are no lodging costs) the amount considered substantiated is the same as above using the per diem allowance for meals and incidental expenses (M&IE).

A per diem allowance is treated as paid for M&IE only if:

• The business pays the employee for actual expenses for lodging based on receipts submitted to the payor,
• The business provides the lodging,
• The business pays the actual expenses for lodging directly to the lodging provider,
• The business does not have a reasonable belief that the employee will or did incur lodging expenses,
• The allowance is computed on a basis similar to that used to compute an employee’s compensation (such as the number of hours worked, or miles traveled).

Businesses that pay employees on a per diem basis should review their procedures for compliance with Rev. Proc. 2019-48 so they can deduct their per diem payments to employees without limitation including 100% for meal costs.  

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.