Common Business Deduction Mistakes and How to Avoid Them
- Andrew Schliesman
- Aug 15
- 4 min read
Updated: Oct 6
1) Mixing Personal and Business Expenses
The mistake: Swiping the business card for personal costs or running personal charges through “Office Expense.”
Why it’s a problem: Muddy books, disallowed deductions, and painful audits.
How to Fix:
Keep separate bank and credit accounts.
Reclassify personal charges to Owner’s Draw/Distributions (equity).
Use an accountable plan to reimburse legitimate employee expenses.
2) Weak Documentation
The mistake: Missing receipts, vague memos, or no proof of business purpose.
How to Fix:
Capture digital receipts and write a 5–10 word memo (e.g., “Client lunch—ABC Co—pricing review”).
For mileage: keep date, start/end, total miles, destination, and business purpose.
Retain invoices, contracts, and agendas for travel and education.
3) Expensing Capital Items that Should Be Capitalized
The mistake: Writing off laptops, machinery, or build-outs as Supplies/Repairs.
How to Fix:
Use the de minimis safe harbor: generally, expense items ≤ $2,500 per invoice/item ($5,000 with an audited financial statement).
Otherwise, record to a Fixed Asset account and use Section 179/bonus depreciation or regular depreciation.
Track improvements versus repairs—improvements are capitalized.
4) Vehicle Deduction Errors
The mistakes:
No mileage log.
Claiming standard mileage after taking accelerated depreciation/§179 on the same car.
Treating commuting as deductible (it isn’t).
How to Fix:
Choose standard mileage or actual expenses wisely in Year 1. If you use §179/bonus first, you generally can’t switch to standard later.
Log miles contemporaneously and allocate them between personal and business use.
Remember: commuting is nondeductible; client visits are.
5) Home Office Missteps
The mistake: Taking the deduction without meeting the exclusive and regular use test or misallocating expenses.
How to Fix:
Confirm a clearly defined workspace used exclusively for business purposes.
Choose simplified method (set rate per sq. ft.) or actual expenses (allocate mortgage interest/rent, utilities, insurance, depreciation).
Keep a simple floor plan and square-footage calculation on file.
6) Meals, Entertainment, and Office Snacks
The mistakes:
Treating entertainment as deductible.
Taking 100% for meals that are only 50% deductible.
How to Fix:
Entertainment is generally nondeductible.
Business meals with a client or prospect are typically 50% deductible, provided there is a documented business purpose.
Employee holiday parties or team events for the benefit of rank-and-file staff are 100% deductible.
Label transactions clearly (e.g., “Meals—Client” vs. “Meals—Employee event”).
7) Travel with Personal Days Mixed In
The mistake: Deducting the whole trip when personal time dominates or the business purpose isn’t documented.
How to Fix:
The primary purpose must be business: keep itineraries, conference agendas, and meeting notes.
Deduct business-day lodging and 50% meals; carve out purely personal days and extra companions’ costs.
8) Misclassifying Workers
The mistake: Treating employees as independent contractors to avoid payroll taxes.
How to Fix:
Apply the IRS common-law test (behavioral/financial/control).
If someone is an employee, put them on payroll and issue a W-2.
Issue 1099-NEC for non-employee compensation; get Form W-9 first.
9) Charitable, Political, and Sponsorship Confusion
The mistakes:
Booking charitable donations as advertising.
Deducting political contributions.
How to Fix:
Charitable gifts are generally not business expenses (C-corps may deduct; pass-throughs flow to owners).
Sponsorships with a clear marketing benefit and display of your brand are typically advertising (deductible).
Political contributions are nondeductible.
10) Ignoring Start-Up & Organizational Cost Rules
The mistake: Expensing everything in the first year without considering capitalization rules.
How to Fix:
You can generally deduct up to $5,000 of start-up and $5,000 of organizational costs (phased out as total costs increase), with the remainder amortized. Track these separately from regular operating expenses.
11) Missing Owner-Specific Rules (S-Corps, Partnerships, Sole Props)
Common pitfalls:
S-Corp health insurance is not added to the owner’s W-2 (losing the above-the-line deduction).
Reasonable compensation ignored for S-Corp owners.
Sole proprietor family wages: special payroll/FICA rules for payments to a spouse or children—set up correctly or skip the deduction.
How to Fix:
Coordinate with payroll to ensure proper handling of owner health insurance and officer wages.
Document reasonable compensation studies for S-Corp owners.
12) QBI (Section 199A) Errors
The mistake: Overstating the 20% deduction or missing wage/UBIA limits.
How to Fix:
Confirm qualified business income after adjustments.
Track W-2 wages and qualified property (UBIA).
Watch specified service trades and income thresholds—optimize with retirement contributions and entity choices when appropriate.
13) State & Local Tax Overlook
The mistake: Assuming federal rules apply identically to your state.
How to Fix:
Verify state treatment of depreciation, meals, NOLs, and pass-through entity taxes (PTET).
Keep separate schedules for state adjustments.
14) Gift Limits and “Swag”
The mistake: Deducting pricey client gifts fully.
How to Fix:
Business gifts are limited to $25 per recipient per year (incidental costs like engraving/shipping don’t count toward the $25). Consider branded promotional items (generally advertising) when appropriate.
Red Flags That Invite Scrutiny
High meals/travel relative to revenue.
Negative gross margins driven by “COGS” that include overhead.
Extensive “Repairs & Maintenance” spikes.
Auto expense with no mileage log.
Home office claimed without documentation.
A Simple Pre-Filing Deduction Checklist
Reconcile bank and credit cards; scan for personal charges.
Run a Transaction Detail by Account for Meals, Travel, Repairs, and Auto—add missing memos.
Separate repairs versus improvements; apply de minimis safe harbor where allowed.
Verify vehicle logs and method (standard versus actual).
Confirm home office eligibility and allocations.
Check owner items (health insurance, retirement, reimbursements).
Review state differences and any PTET elections.
Maintain a digital folder: receipts, agendas, mileage, and year-end summaries.
Bottom Line
Most deduction issues can be resolved with tighter categorization, clearer notes, and consistent monthly reviews. By addressing these common mistakes, individuals and businesses can ensure they maximize their deductions while minimizing the risk of audits and penalties.
For those looking for guidance, Andrew Schliesman Tax & Accounting, LLC is here to assist you in navigating these complexities.
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