Top 10 Deduction Mistakes Small Business Accountants Make

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There are various types of taxes to consider when assessing the overall tax burden for your clients, including federal or income tax and sales tax, which is imposed by states on the sale of goods and services. 

The focus of this article is income tax, however it is good to understand that the two taxes are influenced by each other. For example, the 2018 tax reform brings new rules on the sales tax side, like the limit of $10,000 deductible for individuals. 

In answer to this, some states are planning to adjust their income tax rules to counter-balance the impact of the changes on the sales tax side. I will leave details about sales tax aside for now.

Most new entrepreneurs ask their accountant this common question: “Which expenses are deductible for my business?” The answer I give to all my clients is: “Any expense that is necessary, ordinary, reasonable, documented, and legal may be deductible.”  That is a simple, but accurate answer, but may not cover all of the nuances.

Now, let’s look at some specifics regarding income tax. As I mentioned, there are many nuances in regulations and also in terminology. Let me give you a primer on the more common terms you will encounter:

  • Ordinary: it is commonly accepted in the industry and seen often with other businesses in the same trade
  • Necessary: the expense was required in order to generate the business income or it was incurred as a consequence of the income producing activities. But it does not need to be indispensable in order to be deductible
  • Reasonable: this is very subjective, but in essence it means it is not lavish or extravagant

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About Hector Garcia

Hector Garcia

Hector is a CPA practicing as an Accountant and QuickBooks Trainer/Consultant in Davie, FL for his own firm Quick Bookkeeping & Accounting LLC. Before working in public accounting, Hector worked in several accounting & financial departments of past fortune 500 companies such as: Best Buy, Circuit City, Bank of America, and Wells Fargo.

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Mar 21st 2018 16:07

Hi Hector,

"Any expense that is necessary, ordinary, reasonable, documented, and legal may be deductible."

This is great advice, maybe you could write another article on the grey areas of deductions and what is crossing the line.

Thanks (1)