Can I deduct business expenses paid by someone else?

August 12, 2019 by Glynis Miller, CPA, MST
four people making a business deal

As with any other tax question, the answer is generally not going to be as easy as “Yes” or “No” when it comes to the deductibility of business expenses. Instead, the answer is likely to be “Yes, No, Maybe So,or Not Now.”

The answer is not simple because the question is not simple in terms of what the tax code allows. Understanding which business expenses are referenced can mean all the difference to the right answer. So, what do you mean by which business expenses, you may ask? Well, are we referring to “employee business expenses” or “trade or business expenses.” For this question, we will focus on the expenses of a qualified trade or business.

For a trade or business, a taxpayer is generally allowed to deduct business expenses that meet the following conditions:

 

  • Ordinary and necessary – The expenses that are helpful in furthering the business and appropriate for the type of business being conducted will generally be considered ordinary. If these expenses are commonly used and accepted as being used in the type of business activity, then they are said to be necessary.
  • Paid or incurred during the year – Since taxes are calculated on a yearly basis, the expenses must have been paid for, or the obligation to pay for them occurred in the year deducted. (We will discuss paid or incurred in more detail later.)
  • Not capitalizable – Certain items such as a building or equipment that is used in the business activity may need to be capitalized. When capitalized, the purchase price is carried on the books, and a deduction may be allowed over a certain period of time (depreciation) or at the closing of the business.
  • Verifiable – Taxpayers are required to maintain in their records the proof of any expenses claimed. This proof is necessary in the event of an audit, to prove not only the type of items purchased but the cost and who paid for the item as well as when they were purchased.

If all of the above conditions are met, then expenses are said to be deductible. The question posed, though, is what if someone else paid these expenses? So, the answer to our question could be “Yes, No, Maybe So or Not Now.” How can that be possible? Well, it will depend on the intent behind why someone else is paying for the expenses as well as whether there is income or not. Here are a few examples to consider:  

Yes, you can deduct – A truck driver wants to operate his own truck as an owner but does not have the money to do so alone. So, he ends up working for a company that will allow him to purchase his truck directly from them, and they will pay the expense in advance. At the end of each pay period, the trucking company issues a check to the truck driver but deducts the cost of the truck, fuel, and any other operating expenses. In this case, the truck driver reports as part of the gross income the cost of these business deductions and then will list the expenses so that the net income from the activity is reported on the tax return.

No, you cannot deduct – If someone is paying all of the business expenses directly without you having an obligation to repay them for those costs, you will not be able to deduct those items as your business expenses. For example, if you are a “Social Influencer” whose parents are paying the expenses for your video camera, internet costs, website design and hosting costs and any other supplies used, you will not be able to deduct the cost of these items as business expenses.

Maybe So or Not Now (limited by income) – If a friend paid your business expenses and you do not have any income yet, then you may not be able to deduct them right away. As you earn income, you may be able to deduct some of the expenses up to the amount of income earned. If the expenses exceed the income you are earning and produce a loss on the business; then the losses could be suspended until you earn additional income. However, in a case such as this, there must be an obligation to repay your friend for the investment in your business.  

Remember, a lack of verifiable proof can cause you to lose these deductions even when they would have been deductible. Thus, keep receipts, credit card statements, bank statements cancelled checks, copies of any invoices, and anything else that proves what your expenses are, who paid them and when.

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Glynis Miller, CPA, MST
Tax Content Developer

 

Glynis began her career with TaxAudit in February 2006 as a Seasonal Tax Return Reviewer. In December of 2008, she joined the permanent staff as an Audit Representative. Glynis has been an instructor for both continuing education tax classes and various staff training classes since 2009. Glynis holds a Bachelor of Science Degree in Accounting and a Master’s Degree in Taxation. Prior to joining TaxAudit, Glynis worked in private and public sectors of accounting. She has worked at regional accounting firms preparing tax returns, financial statements, and audit services. Her professional career has spanned over a wide variety of industries from advertising, construction, commercial real estate, farming, manufacturing and more. In 2017, Glynis joined the Learning and Development Department as a Tax Content Developer. She is providing a wealth of accounting and tax knowledge, writing skills, current job awareness, and a very cross-functional skillset to the team. 


 

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