One of the most common questions any accountant gets asked by business owners is “what can I deduct from my income?” The answer to that question is literally….nothing, unless the tax code specifically allows it!

That’s kind of a funny way to say it, but that’s what the law says (and remember, the IRS doesn’t write the law – Congress does!). Nothing is deductible unless allowed.

So what does the law allow? Basic rule – whatever is “ordinary, necessary and reasonable” for your business. Well, that’s kind of vague, isn’t it? Yes, it is, and there are thousands upon thousands of pages of resource material that help people like me decide what is and isn’t deductible, but you’d be surprised how often that basic test – “ordinary, necessary and reasonable” – can answer the question “can I deduct this?”

For example, suppose you sell computer equipment to the general public. What’s “ordinary, necessary and reasonable” to you? Certainly whatever you pay for what you sell (the cost of the product); certainly the cost to operate the store you work out of; certainly the cost of employees. But what about that trip to Las Vegas to attend a convention? Yes, probably. However, there are many Tax Court cases where deductions were denied because while they may have necessary, they weren’t reasonable (one that comes to mind is $1,000 dinner; yes, it was with clients, but the Court said it was not “reasonable”). So maybe that Las Vegas convention is ordinary in your line of work, but maybe what you spend on it isn’t reasonable.

Vehicle expenses are the expenses that most often “trip up” taxpayers who are audited. What’s a “business” mile? From home to office? Office to bank? Bank to customer? Many business owners are tempted to go a little beyond the “ordinary, necessary and reasonable” test in this area!

And speaking of audits – I think a lot more taxpayers have a bad audit experience due to lack of records than they do with the actual deduction itself. Rarely do we see a documented expense get denied (although I did have a client’s deduction of a horse magazine denied – they had a business where they had magazines out for customer’s reading, but they also owned horses – guess the auditor felt the magazine was purchased for personal use more so than business reasons!) – 95% of the time the reason a deduction is denied upon audit is that there’s no documentation! Receipts weren’t kept; a meal receipt doesn’t have the client’s name on it, or maybe a mileage log is not complete as to dates, miles driven, etc.