With the rise of so-called tax experts on social media sites like TikTok, one might believe that creating an LLC is the path to deducting any and every expense that you can push through the company’s accounts. However, it is important to remember that to be deductible, expenses must be ordinary and necessary to the business. While this post will not dive deep into the definitions, a quick primer is helpful. An “ordinary” expense is generally anything that is “common and accepted” for the company’s specific trade or business, while “necessary” is anything that is “helpful and appropriate.”
With that framework in mind, let’s take a look at an example, specifically a bonsai tree. If you as a business owner were to purchase a bonsai tree, could it be considered a deductible expense?
Most office furniture, including decorations, is deductible when it is used in a company’s place of business as long as it falls below certain monetary thresholds. This could include decorations such as plants and, for our purposes, bonsai trees. However, this does not mean that the business can buy a bunch of bonsai trees for the owner’s house and expect to deduct them, assuming the house is used as the owner’s personal residence.
What about decorating your home office? That is going to depend on your employment status. If you are an employee for another company, i.e., you receive a W-2 from that company at the end of the year, then you are not able to deduct expenses related to your home office. Yes, in the past this was different, but with the passage of the Tax Cut and Jobs Act in 2017, employees could no longer deduct expenses related to their home office.
On the other hand, self-employed individuals and independent contractors are still able to deduct expenses related to their home office, if the office is used regularly and exclusively for the business. This means that the entire house cannot be deducted, and even if you have a room that is considered to be your office, it only qualifies if it is exclusively used for that purpose. No sharing it with the entertainment center, or your child’s bedroom.
When you give a gift as part of your business’s operations, it can be deductible with certain conditions. If it is to an individual, the deduction may be limited to $25 per person per year. However, gifts to other businesses do not have the same limit. Similarly, gifts to the company’s employees do not have a limit but may trigger other tax considerations.
With that in mind, providing bonsai trees to others as a gift from the business may result in a deduction, depending on who the recipient is.
This discussion started with the definition of ordinary and necessary and noted that it was dependent on the industry of the business. As one example of this, those companies that hold bonsai trees as inventory, such as nurseries, will be able to deduct the cost of the trees as part of their cost of goods sold. This does not apply to all businesses in every industry but does demonstrate that the deductibility of expenses is determined in part by the company’s industry.
If you have questions regarding the deductibility of an expense or are going through a business audit, contact us today to set up a time to talk.