ASK THE EDITOR: DEDUCTIBLE BUSINESS VS. PERSONAL EXPENSES

Ask the Editor: What prevents me from having my company pay for my personal expenses? I see other business owners doing it.

Answer: The Internal Revenue Service of the United States requires that you keep track of your revenue, expense and income in a certain manner. That manner does not allow you to deduct just anything as an expense. In fact, the IRS says that you can deduct only expenses that are "ordinary and necessary" for the operation of the business.

For further guidance, the IRS defines "ordinary" as common and accepted in a field of business (i.e., the field of business you are in), and defines "necessary" as helpful and appropriate to your business.

Ordinary would include expenses that are frequent and ongoing, such as amounts spent on telephone service or business meals, but it also can apply to something that you pay only once, such as the purchase of a trade booth.

An expense does not have to be indispensable to be a considered "necessary." The IRS will give you the benefit of the doubt on such things. For example, the cost of a client outing or a new piece of art for your reception area is deductible as a necessary business expense, assuming that the former is meant to build a relationship with a client, and the latter is necessary to provide comfort and an "established" feel for employees and customers.

But the cost of a new set of golf clubs purchased by a business owner would not be deductible. Of course, the business owner might claim that he or she needs them to play golf with clients, but the expenditure is largely considered to be for personal use and the IRS would in all likelihood deem them unnecessary. It would be considered a nondeductible personal expense.

In addition to the ordinary and necessary tests, the IRS applies a "reasonable" test. It asks, "Is the expenditure a reasonable expense for the business?" The answer may depend on the particular business at hand. For example, a helicopter might be deemed a necessary expenditure for a private ambulance service or an offshore drilling company or a large forestry company, but not for the owner of three Subway units in a single midsize city. Similarly, a lavish party with caviar and expensive champagne might be deemed necessary for a firm that does business with foreign dignitaries, but not for a local landscape architectural firm.