As an advisor, you might give clients tax advice but it’s also important to know how to handle your business’s tax filing. The Internal Revenue Code includes provisions that allow you to deduct certain expenses related to operating your business. Claiming deductions can help you reduce your taxable income for the year, though it’s important to know what you can—and can’t—write off.
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Understanding Section 212 Deductions
There are different sections of the tax code you might look to when determining what you can deduct as a business expense. One of them, Section 212 of the IRC, states that individuals may deduct all ordinary and necessary expenses paid or incurred during the taxable year for the:
- Production or collection of income
- Management, conservation or maintenance of property held for the production of income, OR
- In connection with the determination, collection or refund of any tax
In simple terms Section 212 allows taxpayers to deduct miscellaneous itemized deductions as long as they meet the “ordinary and necessary” standard. For example, investors are allowed to write off investment fees, including financial advisor fees, under this tax rule. Advisory businesses, meanwhile, can write off tax preparation fees and other expenses.
However, this provision in the IRC was suspended beginning in 2018 with the passage of the Tax Cuts and Jobs Act (TCJA). The suspension of Section 212 is set to continue through at least 2025 and it’s possible that the suspension could be continued beyond that date.
What Expenses Can a Financial Advisor Deduct?
You can’t claim Section 212 deductions for your advisory business, but you have other avenues for managing your tax liability. Section 162 of the IRC allows for the deduction of trade or business expenses that are ordinary and necessary.
- Ordinary expenses are common and accepted in your field of business
- Necessary expenses are helpful and appropriate for your business, though they’re not required to be indispensable
The ordinary and necessary standards are open to interpretation. Following those rules, advisors have an opportunity to deduct a variety of expenses when filing their tax returns. Deductible expenses may include:
- Home office expenses, such as mortgage interest, property tax and utilities
- Self-employment tax
- Depreciation
- Business mileage or actual vehicle expenses
- Travel expenses
- Business meals
- Employee salaries and contract labor
- Retirement plan contributions to a solo 401(k), SEP IRA, SIMPLE IRA or traditional IRA
- Health Savings Plan (HAS) contributions
- Employment benefit programs
- Health insurance premiums
- Business insurance premiums
- Advertising expenses
- Education expenses
- Rent or lease expenses
- Office expenses, such as supplies, equipment or furniture
- Property repairs and maintenance
- Legal fees
- Bank fees
- Payment processing fees
- Bad business debts
- Financial planning software
- Business loan interest
- Taxes, including personal property tax, real estate tax and other state and local taxes
- Property repairs and maintenance
- Repayments of income
Corporations can also deduct startup or organizational costs, up to a certain limit. The IRS defines start-up costs as costs to create an active trade or business or investigate the creation or acquisition of an active trade or business. Organizational costs are the costs of creating a corporation.
The IRS determines what’s deductible and what isn’t for business entities and it’s important to remember that the federal tax code is subject to change. If you’re in doubt about whether an expense is deductible under Section 162, you may want to consult a tax attorney or certified public accountant (CPA) for clarification.
What Expenses Are Not Deductible for Financial Advisors?
Just as there are limits on Section 212 deductions, there are also limits on what you can deduct under Section 162. The IRS disallows deductions for:
- Personal, living and family expenses
- Entertainment expenses
- Bribes and kickbacks
- Charitable contributions (as a business expense)
- Dues paid to business, social, athletic, luncheon, sporting, airline and hotel clubs or associations
- Improvements to real or tangible personal property
- Political contributions
- Lobbying expenses
- Demolition expenses or losses
- Penalties and fines paid to a government agency because you broke the law
- Settlements or payments related to sexual harassment or abuse if the payment is subject to a nondisclosure agreement
- Attorney fees related to said agreements
Keeping Track of Deductible Expenses for Your Business
The IRS offers guidance on the types of records businesses should maintain to track deductible expenses. Here are 10 examples of records the IRS encourages you to keep:
- Bank deposit slips
- Receipts
- Invoices
- Credit card statements
- Forms 1099-MISC
- Forms 1099-NEC
- Canceled checks
- Bank statements
- Petty cash receipts
- Mileage and travel expense logs, if applicable
You may maintain paper copies or electronic records of supporting documents. If you’re using accounting software for your business, you may have the option to scan and upload receipts manually or integrate your bank accounts to track expenses automatically.
Frequently Asked Questions
Are Section 212 Deductions Permanently Suspended?
The Tax Cuts and Jobs Act suspended Section 212 deductions through the end of 2025. It remains to be seen whether the suspension will be extended or if it will be reinstated.
How Long Should You Keep Records of Deductible Expenses?
The IRS says you must keep records for as long as they might be needed for the administration of any provision of the Internal Revenue Code. Essentially, this means that you must keep receipts or other documentation that supports deductions you’ve claimed until the period of limitations for that return runs out.
Are Financial Advisor Fees Tax Deductible?
Prior to the passage of the Tax Cuts and Jobs Act, financial advisor fees were tax deductible. However, that is no longer the case as this tax break was suspended along with other miscellaneous itemized deductions under Section 212.
Bottom Line
Claiming deductions for business expenses can reduce your taxable income which may help push your business into a lower tax bracket. While Section 212 deductions might be off the table, advisors still have opportunities to manage their tax situations efficiently.
Tips for Growing Your Advisory Business
- If you’re ready to start attracting new clients, an online lead generation service can help. SmartAsset AMP (Advisor Marketing Platform)is our holistic marketing service financial advisors can use for client lead generation and automated marketing.Sign up for a free demoto explore how SmartAsset AMP can help you expand your practice’s marketing operation. Get started today.
- Accounting software for financial advisors can simplify expense tracking and cash flow management for your business. When comparing software programs, consider the range of features and benefits offered, integrations with your existing software programs and the cost. You may also want to look for a company that offers guided help with implementing your software to make the transition as smooth as possible.
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