A Beginner's Guide to Business Deductions
The United States tax code has some great advantages for business owners. Millions of business owners leave dollars on the table that should be in their pocket every year when filing their personal and business taxes. Whether you operate as a sole proprietor, an LLC or a corporation, you can lower your taxes and save money by deducting, also called writing off, business expenses. Here are some basic guidelines to get you started.
How deductions work
Every dollar your business earns is considered revenue. Revenue is the big number that represents total sales and receipts, but thankfully we don’t have to pay taxes on our revenue. The government allows us to deduct our qualified business expenses from our revenue to calculate our net income. Taxes are based on your business net income.
Not all expenses related to your business can be 100 percent deducted. Some assets, like vehicles and computers, must be deducted over time through a process known as depreciation. Because you have to eat anyway, meal deductions are limited to a percentage of the total cost. But if you follow the rules, there is no limit to how much you can save on your taxes through deductions. As long as you earn more than your expenses, you can deduct the expenses on your taxes.
Business computers and supplies
If you work online as a freelancer or consultant, you need computers, back up hard drives, USB flash drives, modems, routers and other accessories. Printers, scanners and general office supplies fall into the same set of rules. Depending on the cost, how long you intend to own the asset and IRS rules, you may be able to deduct 100 percent of the cost in the first year or you may have to deduct the value over time using depreciation expense when calculating your net income and accumulated depreciation on your balance sheet. If this sounds foreign to you, it may be best to hire a tax professional to assist with your tax preparation.
If you plan to primarily use your computer for personal use, you can’t deduct the entire cost. However, if the computer is going to be dedicated to your business, you can write off the entire cost. The same goes for any electronics you will use for your business.
Online and offline business services
As an online entrepreneur, I have online expenses for hosting, cloud storage, email list management and other services. Offline I have a virtual assistant who works as a contractor. Because these are business expenses, I can write them off!
Make sure to always get invoices and receipts for the services you pay for as a tax record. If you are audited, showing these receipts will ensure you land on the right side of the audit. I use the service Gusto to pay my virtual assistant, and that company takes care of most of the paperwork and legal mumbo jumbo for my VA.
In total, these services cost around $700 per month. That $700 per month lowers my taxes by my top tax rate, which is around 25 percent. That is $175 per month, or $2,100 per year, in tax savings just from this category.
Every year, I travel to conferences like FinCon, Podcast Movement, TBEX, LendIt and others to make business connections, find new clients and level up my freelance income. Because I’m traveling for business, I can deduct the expenses for tax purposes.
Airfare, hotels, taxis, Ubers, parking and other direct expenses for your travel can be 100 percent deducted. Depending on the circumstances, some entertainment and meals can be deducted as well. Typically, you can only deduct 50 percent of the cost of meals.
Business meals and entertainment
When at home, you can still deduct meals if they are business related. I often meet other entrepreneurs at coffee shops to expand my network. Because these meetings are business focused, I can write them off.
Many companies offer a holiday party to employees and their families around the end of the year. Because my wife is the corporate secretary, we can enjoy an annual “holiday party” dinner at a local restaurant and write off the expense for business. Of course, we can’t write off every meal, but if it is about the business, it’s fair game. Again, consult with a tax specialist like a CPA if in doubt.
If you work from home, there are some tricky rules about deducting a home office expense. If you have a dedicated space that is used 100 percent for business purposes, you can calculate the percentage of your home that the office occupies and write off that percentage of your rent or mortgage and power bill as a business expense. You can also write off internet costs if you use the internet for work.
But be very careful about this. If you use your home office for personal use, it is best to just skip this deduction. A home office write off is a big red flag for an audit, so unless the space is 100 percent dedicated, it is not worth the write off risk.
Like a home office, business vehicles can put your in the cross hairs of a target for an IRS audit. If you own a vehicle that is 100 percent dedicated to business use, you can write it off. If you share it for work and personal use, it is best to leave off of your tax deduction.
My brother-in-law is an independent business owner with a construction company in the Santa Barbara area. His family uses his wife’s car for personal use, and he has a pickup that is dedicated for business use that goes to work sites daily. The personal vehicle is not eligible for a write off, but the truck for work is. He can also write off maintenance, fuel and insurance costs for the truck because he only has it for business.
If it’s for work, write it off!
I use my cell phone primarily for work, so I can write it off. I buy printer paper and office supplies for work, so I can write them off. My expenses last year were tens of thousands of dollars saving me over $10,000 on my taxes compared to ignoring this valuable set of tax rules.
It is better to avoid expenses and pay the taxes, but if you have to spend money for business, you might as well save where you can!
(By Eric Rosenberg)