Information contained in this article is not tax or legal advice. Individuals and businesses should consult their accountant for the most current tax advice.
What is a miscellaneous business expense?
Miscellaneous business expenses are expenses that a business incurs that does not fit in the available categories stated for filing taxes.
When filing business taxes, business owners should claim all legitimate business expenses in order to lower their tax bill as much as possible. In the US, business owners fill out Schedule C (Form 1040) for the revenues and business expenses (in Canada the form is T2125). Typical business expenses that are deductible include advertising, commission fees, employee benefit programs, office expenses, utilities, etc. Additionally, there are a number of business expenses that may not fit into the standard expense categories provided on the forms. In many cases, these expenses qualify as miscellaneous business expenses and are in fact deductible.
It is recommended that business owners and employees alike consult their accountant for the most up to date tax advice. Rules governing filing can differ between countries, states, and even industries.
Filing for miscellaneous business expenses
In the US, all expenses are filed through Schedule C (Form 1040) and miscellaneous expenses are filed as “Other Expenses” through Part V line 48 of the form. In Canada, form T2125 is used for filing all expenses and miscellaneous expenses are filed as “Other expenses” on Part 4 of the form.
Common miscellaneous business expenses
Work clothes – clothes that are only worn for work and cannot be worn in everyday life can be deducted as a miscellaneous expense. Examples of this include uniforms or safety items, such as safety boots, safety glasses, and work gloves. Suits, regardless if they are only worn to work, cannot be deducted since they can be worn in everyday life.
Internet service – monthly invoice for internet is considered a utility, thus, it can be deducted with the Utilities expense along with heat, power, and hydro.
Interest and bank charges – in Canada, interest charged on business loans and fees paid for bank accounts are deductible as miscellaneous expenses. This includes any penalties or late fees paid on a bank loan. There are other options as to how to treat interest paid on a business loan. For the optimal tax return, consult an accountant on what is the best treatment for the lowest tax bill.
Business start-up costs – in the US, business owners who are filing in their first year of operation can claim up to $5000 in business start-up costs under Other Expenses. Amounts above and beyond $5000 will need to be amortized over 180-month period.
Education and training expenses – fees paid for business owners or employees to complete education and courses that “maintains or improves skills required in your trade or business” can be deducted as Other Expense.
Bad debts – organizations with outstanding accounts receivables that they deem uncollectable can be expensed through Other Expenses. In the case that the business is able to collect after it has written off as Other Expense, the business will need to recognize the payment as revenue for that year.
Club dues and membership fees – fees for professional organizations or organizations that are necessary for you to conduct business can be claimed under Other Expenses. Examples of this can include monies paid for Project Management Institute or the Chartered Financial Analysts Institution. Club dues that are not deductible are personal or hobby related club fees, such as golf club memberships.
Business expenses that are not allowed
Fines and penalties – pick up a parking ticket during a client meeting? Unfortunately, such fines and penalties are not deductible on your tax return.
Illegal activities – any expenses that are deemed for illegal activities are not deductible. For companies that operate with bifurcated legality considerations, such as cannabis companies which are legal in certain states but not federally, it is recommended to consult an accountant for the types of expenses that can be claimed.
Capital expenses – purchases of equipment use for long-term, such as computers or a machinery, are not deductible expenses. Instead, the cost of the item will be depreciated over the life of the asset. The depreciation is tax deductible as an expense.
Entertainment expenses – in the US, purchases for entertainment, such as sporting event tickets or concerts, are no longer deductible expenses. In Canada, such fees are still deductible.
Home office space – both in the US and in Canada, the IRS and CRA respectively have restrictive guidelines around what is deductible for home office. The general rule is that the space must be used exclusively for the business in order for a portion of expenses to be deductible.
Political contributions – contributions made by the company to a party is not a deductible expense.
What if I accidentally claim the wrong expense?
We all make mistakes from time to time, and mis-categorizing and or accidentally filing the wrong expense may happen. In both the United States and Canada, making a mistake on a miscellaneous expense will usually lead into recategorization of that expense (meaning the government will calculate based on what they deem is the appropriate category). In more severe cases, mistakes can provoke the IRS and or CRA to engage in an audit. It is recommended that business owners and employees alike seek advice from an accountant when filing their taxes.
- Miscellaneous business expenses are legitimate expenses incurred by a business that do not fit in any existing expense category
- Common miscellaneous business expenses include bad debts, internet service, club and membership dues to professional associations
- Business owners and employees should always consult their accountant for the most up to date tax advice as rules do differ between states, countries, and industries