How to Claim Business Expenses

As a new business owner, you’re entitled to claim businesses expenses against your LLC’s income to enjoy a lower tax rate. This is an interesting yet confusing process to any newcomer. There are several important points you’ll need to know about claiming business expenses, as this is a process that is closely observed by the IRS.

Don’t Claim Anything that Isn’t A Business Expense!

This is the most obvious point of advice. Unless you can justify that a purchase is necessary and to be used solely for the LLC, don’t claim it when doing your taxes! When claiming business expenses, be sure that they follow all the following elements set forth by the Internal Revenue Service (IRS), under Section 162(a):

  • The expense is ordinary
  • The expense is necessary
  • The expense is an ‘expense’ and not a ‘capital expenditure’ (an expenditure that
    creates future benefits, i.e., an equipment upgrade whose benefit extends beyond the year)
  • The expense is paid or incurred during the current taxable year
  • The expense has to be in carrying on the activity
  • This activity must be trade or business related
  • As you claim a business expense, a good rule of thumb is to ask yourself if your claim truly is business related, and is necessary to conduct business. While it would not make sense to claim a new dishwasher for your home, it might make sense to claim the lunch you’ve purchased after taking a client out yesterday afternoon, or the combination fax machine & printer you’ve just purchased. Use extreme care and discretion, while keeping all receipts or other documents handy. If you should happen to be audited by the IRS, these documents will be a vital and valid paper trail to help the auditor understand what your expenses were, what they were used for, and why they were necessary for your business. Claiming purchases as business expenses is an extremely beneficial right given to you by the government. Never abuse the system or give into the temptation of claiming purchases that are above and beyond the scope of your LLC’s operation!

    Claiming a Home Office or Home Work Space

    Larger claims, such as office space, room rentals and other costly expenditures, are looked at more closely by the IRS, and have the highest chance of prompting an audit. Be sure to justify these claims by keeping records that include square footage, mortgage and utility bills, and even photographs of the premises. Here are several best practice guidelines for claiming your home office and utilities. Do keep in mind that it will most likely result in a guaranteed audit. However, if approved, the benefits will be significant for your tax return:

  • Take pictures: Take multiple pictures of the room you plan to claim as your home office. Take pictures of all four corners, and a picture from the doorway. You can even make a quick video, rotating the camera from the center of the room until you’ve captured footage of the entire room. That may be a little extreme, but this will all be used as collateral when you are audited.
  • Measure the room: Use measuring tape and measure the perimeter of the room (that is, all four enclosures). If your room is oddly shaped, you’ll most likely want to create a blueprint or diagram of the room, noting the width of each wall or angle. Measure the height of the room, too. Include all square footage information on your diagram.
  • Claiming a Home Office: Roadblocks

    Since claiming a home office is a very touchy subject in the eyes of auditors, you may come across certain roadblocks as to how much you can claim. For instance, claiming utilities including electricity and heat will most likely be based on rent paid per month, or a percentage of how your home office room uses per month. It’s also important to note that if the home owner or person paying the mortgage is not you, some difficulties may arise in claiming utilities.

    When it comes to claiming a home office space, those with “internet-based” businesses have greater justification than those who do not spend the majority of their business time in their designated home office.

    Claiming Travel Expenses

    Use your discretion when claiming expenses such as gasoline, air travel or any other commuting expense. Remember, if it wasn’t used solely for the business, nor can this be proven, then, you should not claim it. However, if you drove 50 miles to buy a new computer for your LLC, you most certainly can claim all commuting expenses from gasoline to tolls and even lunch. When claiming gas, be sure to reference the internet to note the current claimable cost of gasoline per mile, and simply multiply that by the number of miles driven. Keep the receipt from the gas station as proof.

    Where to Go Next: LLC Accounting