Tax Law (Questions About Taxes)/Possible tax deduction?

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Question
Hello, Sir! Thank you for taking the time to read this. I'm not sure if this is an easily answerable question, I know nothing at all about taxes and I was just hoping for some general advice to get me through until I can choose an accountant.

Within the last month or so, I've decided to turn a longtime hobby into a business. Sole proprietor out of Minnesota. It's a traveling event coordinating and hosting business for children's dance studios. I hire local students and veterans in whatever city I hold an event whenever possible, otherwise I'm my only staff.

However, I've gotten a touchingly positive reaction to this business just in this short time and I've been thinking of hiring a gal who's volunteered with me in the past when I've gone through Illinois, she's a great worker and it would help me so much to have somebody join me when I go to locations that are too far to drive to.

I've been doing this for years, but I've been doing it at cost, using my paychecks from my regular job to finance it and since I've never charged, this has never been a tax issue. Now that it's a business, I'm trying to be more aware of everything.

The gal who I'd like to have assist me on the traveling events is a retiree, so she's living on a budget. I will be paying for her plane tickets and hotel rooms, she's worth it. But it was mentioned that these might be things that I can use as tax deductions next year, which would be a huge bonus. Do you know if that's accurate?

Many thanks!

Answer
FI,

When you are operating a business, any ordinary and necessary expenses may be deducted as long as they are reasonable in amount.  Those terms need some explanation, as they have particular meaning in the tax world.

Business expenses are costs associated with running an existing business. The costs associated with starting up a business are treated as "start up expenditures." Many, but not all business expenses, are tax-deductible if you are operating your business for a profit.

Business expenses do not include capital expenses, personal expenses, or expenses used to calculate the cost of goods sold. These expenses are listed separately on your taxes.

Business Expenses Must Be “Ordinary and Necessary.” The key word here is “and.” To be deductible as a business expense, the expense must be both “ordinary” and “necessary.“ Ordinary and necessary expenses must also be “reasonable,” or the IRS may disallow the expense.

Ordinary Expenses are things that are commonly used, and accepted by general industry standards. That is, things that are typical in your trade or business that are needed to run your business. Ordinary expenses must also be necessary in order to deduct them from your business taxes.

Necessary Expenses are costs for things helpful and appropriate in running your trade or business. Necessary expenses are not tax deductible unless they are also ordinary expenses.

And the final filter is that they must be reasonable in amount. In your situation, for example, staying in $1,000 a night hotel rooms would probably not be reasonable in amount.  However, an expense must usually be pretty outrageous to be examined by the IRS simply as being unreasonable.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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