A challenge for many new business owners (and more current business owners than you’d think) is knowing what qualifies as a legitimate business expense. While it is possible to use company funds to pay for many things, it may not always be deductible for tax purposes and, in some cases, may actually count towards an individual’s income.

One example of this is clothing. Clothing can be tax deductible if it must be worn as a condition of your employment AND that clothing cannot be suitable for everyday wear. So, while you may be required to wear a jacket and tie at the office, you are not legally allowed to deduct it from your taxes. What would make it deductible is if that clothing was a uniform with the company name printed or embroidered on it. This makes it a promotional item and an advertising expense.

Another example is gifts given by the business. While gifts are generally deductible, only $25 of gifts given to an individual can be deducted by the company each tax year. So if a gift basket of snacks to a client costs $60, the company can only deduct $25. This doesn’t prevent the company from giving the gift, it just means the additional $35 spent will still be taxed as though the money wasn’t spent… as will any additional gifts bought for that person for the rest of the tax year. There are some exceptions to this rule, though. Items that have your company’s logo permanently engraved or otherwise attached can exceed this limit, again, as an advertising expense. Another example would be an item that would be given to a client’s company to help with their own operations, such as a specialized tool that might relate to your company’s products.

Confused? You’re not alone. But this is why it helps to have people who deal with these issues regularly to help you understand the regulations and how to use them to your advantage. If you have questions or just want to understand things better, please reach out and let Brightleaf help you!

- John Thrush