If you deduct personal expenses as business expenses, the IRS may conduct an audit; and ask you to remove the incorrect deductions and pay the balance. Generally, you cannot deduct personal, living, or family expenses on your tax return. If you have an expense that is partly business and partly personal, you can divide the cost in half, and deduct one half as a business expense.
According to Publication 535 from the IRS, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. For example, if you are running a cooking website as a small business, you can write-off the fancy cutlery you bought (if you are using it for your business), but not the new television. You can deduct business expenses even if they are not indispensable to your business.
When you mix business with pleasure, such as extending a business trip for a week to include a vacation, your personal expenses can get confused with your business expenses. Danger lurks when you are unsure of what you can deduct as a business expense, or you find yourself in a gray area. In order to be certain you don’t trigger an IRS audit, consider the following:
Never use your business credit or debit card for personal expenses
- Keep business and pleasure trips separate. If combined, keep particular days for business and other days for family/friends
- Don’t be tempted to write-off personal purchases such as games, printer, computers, etc. as business expense unless you are using them to make a profit
Deducting business expenses as personal has another danger: back taxes. If the IRS discovers that you deducted personal expenses as business expenses, they may charge a penalty for claiming false deductions and demand payment of the balance with penalties and interest if the filing deadline has passed. The unpaid balance after removing the false deductions will be treated as back taxes if they are not paid before the filing deadline.
Instead of sorting out expense receipts later, it is advisable to separate your business expenses and personal expenses for better organization and less stress at the time of tax return preparation.