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A basic understanding of business expense deductions: Part I

If you own a business or are trying to start one, you have probably realized the legal regulations that business owners must abide by are often complex and confusing. Tax compliance alone is complicated enough to make you rethink your decision to be an entrepreneur.

We certainly can't cover all relevant tax issues in this blog. But in this week's posts, we'll talk about one tax issue that has landed many small business owners in trouble: deducting business expenses. If done correctly, business deductions can save you a lot of money. If done incorrectly or dishonestly, some business deductions can actually lead to criminal charges.

One of the biggest issues people face is deciding what qualifies as a business expense. What about expenses that could also be considered personal?

On its website, the IRS notes that an expense must be both ordinary and necessary in order to be considered a deductible business expense. Here is how the IRS defines those two terms:

Ordinary: An expense "that is common and accepted in your trade or business"

Necessary: An expense "that is helpful and appropriate for your trade or business" (but it doesn't have to be indispensable)

Some business owners get charged with tax fraud for erroneously classifying personal expenses as business expenses. While the misuse of deductions is often intentional (meaning the business owners intended to commit fraud), that's not always the case. These IRS definitions still leave some room for interpretation. That's why it's a good idea to bring specific questions about your business to a hired professional with an intimate knowledge of tax law.

Please check back later this week as we continue our discussion about business expense deductions.

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