Q: I had an accountant do some work for my business, can I deduct the fees as an expense?
Answer: It depends. You can only claim expenses that are “ordinary and necessary” in your trade or business. Your accountant may provide a service that is necessary to your business, but it must be one that is used and useful for your business. Generally, you can only deduct amounts that have been incurred and paid during the tax year.
For example: You file your corporate income tax return by March 15th of each year with a $1,000 balance due. You pay this liability on April 1st of the same year ($1,000). You may only deduct the $1,000 on your return for the year in which it was incurred.
However , you can elect to deduct business expenses paid during the current tax year even if they were not due and payable during that same year (see Section 162(a)(2) of the Internal Revenue Code). This is called the “Cash Method of Accounting”. In the above example, you could claim a deduction for the $1,000 paid on April 1st even though it was not due until April 15th.
Keeping good records throughout the year of all expenses incurred is essential to being able to qualify for these deductions at tax time. Here are a few other things to consider:
Typically, an expense is ordinary if it is a type that is common and accepted in your industry. An expense generally qualifies as being necessary if it meets at least one of the following criteria: 1) It's appropriate for your business; 2) It's helpful for your business; or 3) It's appropriate and helpful for your business.
Example: You’re a commercial printer and you purchase an annual financial magazine to help keep informed of current trends in the printing industry (appropriate).
Even if an expense doesn't qualify as either ordinary or necessary, it may still qualify as being capital in nature. This means that the transaction would not result in an adjusted basis for the property. Example: You purchase a car to use exclusively in your business (capital expense).
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