Stay Ahead of Law Changes & Protect Yourself Against Being Audited: Corporate Transparency Act and Reasonable Compensation

What are 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.

The Molen & Associates Difference

Mike Forsyth

“Super helpful and timely. This is our first year with them and we look forward to trusting them with our taxes and business books for years to come.”

Caitlin Daulong

“Molen & Associates is amazing! They run an incredibly streamlined process, which makes filing taxes a breeze. So impressed with their attention to detail, organization, and swift execution every year. Cannot recommend them enough!”

Sy Sahrai

“I’ve been with Mr. Molen’s company for few years and I felt treated like family respect and dignity. They are caring, professional and honest, which hard to find these days. Love working with them.”

Tax Tips for Newlyweds

Tax & Financial Tips for Newlyweds in Houston Marriage is a significant milestone that not only unites two individuals in partnership, but in most cases, also merges their financial and tax situations. For newlyweds in Houston, understanding the tax implications...

Self-Employment Taxes: A Deeper Dive

Self-Employment Taxes: A Deeper Dive Self-employment taxes are a critical component of the tax system in the United States, impacting individuals who work for themselves. Understanding the nuances of these taxes can help self-employed individuals plan and manage their...

Education Tax Benefits: Maximizing Savings with Credits and Deductions

Education Tax Benefits: Maximizing Savings with Credits and Deductions Navigating the complexities of tax season can be daunting, but for those bearing the costs of higher education, there are valuable tax benefits that can ease the financial burden. Among these are...

How to request Individual Penalty Abatement

How to Request Penalty Abatement Penalty abatement is a great way to help reduce your client's tax debt. Here's how you can request apenalty abatement from the IRS. Let’s say you’ve determined that your client is eligible for a penalty abatement to help reduce their...

Understanding the Child Tax Credit for 2023

Understanding the Child Tax Credit for 2023 The Child Tax Credit (CTC) is a significant provision in the U.S. tax code designed to offer financial relief to families with qualifying children. As we navigate the 2023 tax year, it’s crucial to understand the current...

Tax-Smart Strategies to Pay for College

Tax-Smart Strategies to Pay for College   As the cost of college continues to rise and inflation soars, families are looking for ways to make ends meet. One way to do this is by taking advantage of tax breaks that can help offset the cost of tuition and other...

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections

Unlocking Financial Freedom: The Strategic Power of Revoke-S Elections As a small business owner, you understand that time, money, and peace of mind are precious commodities. The world of taxes can often feel like a labyrinth of complexities, with ever-changing rules...

The Augusta Rule: A Comprehensive Guide to the Section 280A Deduction for Small Business Owners

As a small business owner, you’re likely familiar with the home office deduction. This popular tax break allows you to write off up to 300 square feet of workspace in your home at a rate of five dollars per square foot, resulting in a potential $1,500 annual...

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings

Unleashing the Mega Backdoor Roth: Maximizing Your Retirement Savings Embark on a financial adventure with us as we introduce you to the not-so-secret world of the Mega Backdoor Roth – the financial strategy that's not only powerful but sounds almost as charming as a...

Get Organized and Sail Smoothly with a Family Tax Firm

How to Get Organized and Sail Smoothly with a Family Tax Firm? Tax season—an annual event that can trigger a range of emotions, from anticipation to anxiety. For small business owners, the prospect of tackling complex forms, deciphering intricate regulations, and...

Request an Appointment Today

11 + 3 =

Call us at

Pin It on Pinterest

Share This