Business Expenses vs Personal Expenses

A business owner needs to know the difference between a business expense and a personal expense. Business expenses can be claimed against the profit to reduce taxes and save money. Personal expenses cannot reduce taxes for your business.

Definition Of A Business Expense

The IRS definition of a business expense. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is common and accepted in your trade or business. A necessary expense is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Example of Business Expenses

• Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
• Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ retirement.
• Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
• Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
• Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
• Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
• Travel expenses―If you are traveling for business for more than a day, your food and lodging a business expenses. Local transportation that involves travel between workplaces (cabs or public transit between offices)
• Dues or subscriptions to professional or business organizations
• Union dues
• Uniforms or other work clothes that are required for work and are not suitable for other wear
• Work-related educational expenses
• Tools and any supplies necessary for your work
• Home office expenses — only if the office is used exclusively for work
• Business use of your car (mileage shouldn’t include personal trips)

Example of Personal Expenses

• Commuting expenses – travel costs from home to work are your responsibility
• Fines or penalties, e.g. parking tickets
• Accreditation Fees – costs associated with continuing education are business expenses, but accreditation fees, such a bar or licensing exam, are considered personal expenses
• Business attire(unless it’s a required uniform)
• Travel expenses for spouse or children if bringing family along on a business trip

Additional Info

• Business expenses are defined as costs that are ordinary and necessary for your trade or business. Ordinary means the expense must be a common one for your industry. Necessary means the expense must be helpful to your business. If you are ever in doubt determining if something is business the first place you should start is by asking yourself if it is ordinary and necessary.
• The IRS does not have a formal definition of nonbusiness expenses, however, nonbusiness expenses will generally tend to not be ordinary and necessary, provide you with a significant personal benefit, provide a related party or family member with a significant benefit, or not meet specific IRS requirements for deduction.
• One of the best ways you can help draw the line between your personal and business expenses is to open up a business bank account. Simply having a separate credit or debit card that you only use for business can greatly reduce the likelihood of mixing up business and personal. Additionally, be sure you keep good records.
• If you use an asset for both business and personal, keep track of what percent of your use is related to your business activities. Picking a meaningful metric to track business use, such as mileage, square feet, or time can help you turn your estimate into a substantiated amount that can be used to help you divide costs accurately.
• More often than not you will know right away what side of the line an expense falls on. If you don’t, ask your tax advisor or accountant.