The Ultimate Guide to Common Business Deductions

Okay, folks, it is Kevin Molen once again with Molen and Associates. But today, today, we are talking about a crucially important topic. We’re talking about common business deductions. Now, I don’t want this video to be an hour long, so I’m going to try and give you the really important fundamentals that you need to understand. So today I’m going to teach you how to fish as opposed to giving you a fish, if that makes sense.

First, let’s talk about the essentially the Internal Revenue Code, which stipulates what is a business deduction. For all intents and purposes, there is one paragraph in the tax code that really defines what a business deduction is. And to paraphrase this, this paragraph, it essentially indicates that a business deduction or qualifying business deduction is something that is both ordinary and necessary and specifically in regards to your business. So now let me explain what what the Internal Revenue Code means when it says ordinary and necessary. There have been several court cases to help define what these two words mean. So we’re not just going to search it up on the Internet real quick and have Webster tell us exactly what it means. We’re going to have several court cases since 1913 to describe what the words ordinary and necessary mean. The word ordinary has been determined through court precedent to mean normal or typical in your trade or business. Now, if you right now go and look up ordinary. If you type ordinary in Thesaurus.com, then you’re going to find normal and typical, regular, common, those kinds of words as synonyms.

So ordinary means normal or typical in your trade or business that one tracks no problem. The second word necessary has been interpreted to mean helpful. Now. I don’t know about you, but to me helpful is not a synonym of necessary. It really fundamentally changes the word. Now, the thing is, is you have to meet both of these standards. It has to be both ordinary, normal or typical in your trade or business and necessary or helpful in your trade or business. Now, helpful is a much broader range than necessary. Necessary may mean required or or you must have it right. And so so these two words, the definition of these two words really matters a lot. So to give you a little bit of an example, let’s just go through a thought exercise for a moment. Let’s say that you purchased a pair of snow skis and you came to see me and you said, Hey, Kevin, I bought a pair of snow skis this year. Now, to give you some background. I, I live and work in Houston, Texas. I have never skied before in my life. So when we talk about skiing, this is a subject that I just try to get as far away from what I know as I can. So let’s say you are a manufacturer in Houston, Texas, and you come to me and you say, Hey, Kevin, I bought a pair of snow skis.

Kind of write these off as a business expense. What do you think? I’m going to tell you? Probably not, but it depends. What did you use them for? And then you go on to tell me how your biggest manufacturing contract that you’ve ever secured as a client in Colorado, of which you spend about six weeks up there, and part of what you were doing was spending time with them on a ski slope. Right. You had to pair had to have a pair of snow skis in order to do that. So now you come to me. You say, Kevin, based on these factors, can I ride off these snow skis now? What do you think my answer is to you? Probably yes. It still can depend on certain factors like the profitability of the business and such, but probably the answer to that is yes. Now what happens is you go home and you tell your neighbor, Hey, I got the best guy, best tax guy in the world. He got he he got it so that I could write off these snow skis that I bought this past year. And your neighbor says, you know what? I have always loved snow skiing. So they go out and they buy four pairs of snow skis. And then they come to see me and they say, Hey, Kevin, I hear you’re the guy that can deduct snow skis. So I bought four pairs.

I want you to write these off. What do you think I’m going to tell them? Probably not. But what did you use it for? Nothing. I just really like snow skiing. Well, now, what’s my answer to them? It’s neither ordinary nor necessary and certainly doesn’t qualify as a business expense. Based on the context. As I understand it, it’s crucially important that we get out of the echo chamber of the Internet. I say this ironically as you’re listening to this over the Internet. But but we’ve got to get out of that echo chamber. We’ve got to get out of what our friends are saying. And we have to dive into what really works and what really is applicable. This is why you need a competent tax advisor to help guide you through what you’re spending money on. Now we can use. See, my goal is not to get you to spend more money so that we get more tax write offs. My goal is to make sure that the money that you are spending that is deductible. We’re not leaving on the table. So that’s your quick introduction, your primer on business deductions and common business deductions. Because really what I’m doing today is I’m teaching you how to fish. I’m not giving you a fish if what you want is more industry specific expenses. We have several industry specific business deduction checklists on our website, so check us out and mail in tax under resources. You’ll find them there. Thanks.