Question

Should deductions be capped to what are resonable expenses rather than actual expenses?

Answer 1

Deductions:

Deductible expense are those expense that can be subtracted from a company's income before it is subject to taxation , it means that these expenses are allowable from company's income as they are related to business and hence , helpful in reducing the tax burden upon the company , on the other side these expenses are reasonable that help to earn business income.

There is close relation between ordinary expense , necessary expense and reasonable expense , the internal revenue service , (IRS) has define in the sense that an expense which is helpful and appropriate for the business is categorized as reasonable, like general and administration expense , business related travel ad entertainment , auto mobile expense and employee benefit expense which are given in section 162 of IRS code .

Some expenses are considered as current and are deducted in the year they are paid while other expenses are considered as capitalized and must be spread out or depreciated over the time period.

There are few business expenses which are prohibited by law from being deductible , even though these expenses may be used by the business to earn income like -

- Bribe paid to public official

- Traffic tickets

- Clothing one wear for work unless required information

- Expenditure deemed to be unreasonable charged

These are also helpful notes to the requirement:

Conclusion:

The good management of a business must include efficient management of the company's tax liability , maximizing the deductions and minimizing the obligation or duties but within the limit of law by taking advantage of allowable tax reduction one can benefit to small business owner in many ways.