Business expenses

Business expenses are the costs of running a business and earning its income: rent, salaries, supplies, software, travel, advertising, professional fees and the like. Most of them reduce taxable income, as long as they meet the tax authority's tests and are backed by records.

The tax tests

In the US, the IRS allows a deduction for expenses that are both ordinary, meaning common and accepted in your field, and necessary, meaning helpful and appropriate for the business. In Canada, the CRA allows a deduction for any reasonable current expense incurred to earn business income. Both exclude personal expenses, and both allow only the business portion of a mixed-use cost, such as a phone or a car used for both.

Current versus capital

A current expense is deducted in the year it is paid or incurred. A capital purchase, such as a vehicle, a computer or equipment that lasts several years, is not deducted all at once. It is written off over time: capital cost allowance in Canada, depreciation in the US.

Common limits

Meals and entertainment are the best-known limit. In Canada, the deduction for food, beverages and entertainment is generally capped at 50% of the lesser of the amount spent and a reasonable amount. In the US, business meals are generally 50% deductible. Both have exceptions.

Records

A deduction is only as good as its proof. Each expense needs a receipt or invoice showing the date, the vendor, what was bought, the amount and the sales tax. Capturing receipts when the expense happens, rather than at tax time, is the simplest way to keep every deduction you are entitled to.