An expense must be directly related to your business to be deductible as a business operating expense. This means that you cannot deduct personal expenses. For example, the cost of a personal computer is a deductible operating expense only if you use the computer for business purposes; it is not deductible if you use it to pay personal bills or play computer games. If you buy something for both personal and business use, you can deduct only the business portion of the expense. For example, if you buy a cellular phone and use it half of the time for business calls and half of the time for personal calls, you can deduct only half of the cost of the phone as a business expense.
A business expense for one person can be a personal expense for another, and vice versa. For example, a professional screenwriter could probably deduct the cost of going to movies—he needs to see movies for his screenwriting business. But a salesperson could not deduct this type of expense.
Many expenses have both a personal and business component, which can make it difficult to tell if an expense is business-related. Because of this, the business-related requirement is usually the most challenging factor in determining whether an expense qualifies as a deductible business operating expense.
Even the most straightforward costs can present difficulties. For example, it’s usually easy to tell whether postage is a personal or business expense. If you mail something for your business, it’s a business expense; if you mail something unrelated to your business, it’s a personal expense. But even here, there can be questions. For example, should a doctor be allowed to deduct the postage for postcards he sends to his patients while he is on vacation in Europe? (Yes—the tax court said the postage was deductible as an advertising expense; Duncan v. Commissioner, 30 TC 386 (1958).)
Let's see how good you are at spotting business tax deductions. Which of the following expenses do you think are deductible business expenses:
1. Dental expenses a professional actor incurred when his teeth were knocked out while making a boxing movie.
2. Flowers the president of a loan company sent to employees while they were in the hospital.
3. High-protein foods a person with a rare blood type ate to maintain the quality of her blood so she could regularly sell it to a serological company.
4. Money an author paid to prostitutes while researching a book on legal brothels.
5. A bar mitzvah reception for a rabbi’s son.
6. Parking fees a college professor paid to park on campus.
Answer: 1,2,3 were deductible; 4,5,6 were not deductible.
1. The dental expenses were deductible because they were directly attributable to the taxpayer's occupation as an actor.
2. The flowers were deductible because the expense benefited the company, not the president personally.