There is no sugarcoating it: taxes are a pain. They can be complex, time-consuming, and downright confusing as you try to file income tax return for the year.
Chart your accounts to maximize your tax deductions and make it simple for you tax preparer. In addition, you will find ways to increase or reduce your overhead expenses by classifying your expenses. How are you supposed to understand them completely if a single box of donuts can be coded in ten different ways? Yes, you read that correctly: one box of donuts can be coded in ten different ways, potentially showing up on at least seven different tax forms (Schedule C, 1120, 1120S, 1065).
In business, very few things are simple as just buying a box of donuts. My goal is to help you comprehend important information and then implement what you have learned into your work life. That is why I have broken down for you the many ways you can code certain business expenses on your tax forms by giving you examples of scenarios in which they apply.
Revised on 11/22/2018
Let’s start off by identifying which expenses are not deductible. If I buy a box of donuts and eat the whole thing by myself at home, there is obviously no deduction. I bought them for myself and only myself. (However, if I buy donuts and eat them while I am traveling for business, the expense is actually 50% deductible.)
- 50% Deductible Business Expense
I buy a box of donuts and share them with the ten people attending my first sales meeting of the day. When I do something like this, the price of the donuts is 50% deductible.
- 50% Deductible Unreimbursed Employee Expense
Another case in which the expense would be 50% deductible is as follows: I buy a box of donuts for the ten people attending my first sales meeting. However, this time I am an employee, and my employer requires me to supply food for the people in my business meetings–and does not reimburse me for it. (While this may be 50% deductible to you, it is an itemized deduction, so it will not even begin to count until these expenses add up to more than 2% of your income.)
- 100% Deductible Business Expense
Certain expenses are entirely deductible. “What kind, though?” you might be asking. Say I buy a box of donuts. I take them to my first sales call and then leave them in the lobby for everybody to enjoy, even people off of the street. The price I paid for those donuts is completely deductible on my tax forms!
- 100% Deductible Unreimbursed Employee Expense
This situation is the same as the one above, but this time, I am an employee, and my boss yet again failed to reimburse me for the donuts he or she told me to buy. That expense is totally, completely deductible when I file my taxes but not for my employer.
- 80% Deductible Business Expense
Here is where the deductions begin to diverge from the ones above. Let’s say I am driving my big rig across the country, subject to the Depart of Transportation rules, and I purchase some donuts to eat for breakfast and lunch. The price I paid for the food is 80% deductible when filing income tax return.
- 80% Deductible Unreimbursed Employee Expense
This is the same case as #6, but now I am an employee, and my employer does not provide me with provision for meals while I drive. The expenses for food during my travels for work are 80% deductible.
- 100% Deductible Charitable Contribution
Contributions to charities are also deductible on your tax forms. If I buy a box of donuts and donate it to a church bake sale, my donation is 100% deductible. However, this situation differs for a corporation. It would still pass through to the shareholders, but it would not be deductible at the corporate level.
- 100% Deductible as COGS aka Cost of Goods Sold
This one is simple. I buy a box of donuts in order to resell them. The cost of the box is another purchase that is completely deductible.
- 100% Deductible as an Ordinary and Necessary Business Expense
In this scenario, I buy a box of donuts to use as a prop while speaking to an audience about the many different ways a box of donuts can be coded on tax forms. The price of the donuts as my prop is 100% deductible!
Join us sometime for our holiday parties. And you guessed it right, all expenses are 100% deductible.
- Entertainment is 0% Deductible
That is right, all entertainment expenses are not deductible.
Once you start to understand the many different ways an item can be coded on your tax forms, you will be able to start implementing this new knowledge into your daily life! Think about all of the expenses you could be deducted from your taxable income–and start saving money!
Now… am I the only one who wants a donut?
When in doubt always refer to the IRS website.
Thank you to the original author (yet to be found) for sharing this insight with us and allowing me to share such valuable information with my readers!