There are 4 rules to follow to make a business expense deductible.
Rule #1 is that the expense must have a business purpose. This is where all expense deductions start. They must be tied to the business.
Rule #2 is that the expense must be ordinary. This means the expense is typical for your type of business. The kind of expense, cost and frequency all need to be in line with industry norms.
It would be typical for a medical office to have annual software licenses to manage patient records. That’s likely an ordinary expense. It would NOT be typical for a medical office to buy a herd of alpacas. If that expense is in your future, you may need a different business entity.
Rule #3 is that the expense must be necessary. In other words: Does this expense make money? This test is one of Tom’s favorites. When you ask yourself this question before you make every purchase, you increase the profitability of your business.
Rule #4 is that you must document the expense. Even if an expense meets the first three rules, the IRS will disallow the deduction if you don’t document it properly. Make documenting your expenses part of your regular bookkeeping process.
What is good documentation?
It depends on the expense but may include:
✅ Detailed receipts
✅ Mileage or other activity logs
✅ Loan documents or other business agreements
✅ Meeting minutes
The government wants you to grow your business. Deductions are just the tip of the iceberg when it comes to how the government incentivizes business ownership.
If you’re ready to build more tax-free wealth with your business, schedule a call with the team at TFW Advisors® to learn more!