As a small business owner with a growing income, you can take advantage of one of the greatest parts of being an American – writing off expenses to lower your tax bill! I save thousands of dollars each year by knowing the rules of what I can write off, and if you are missing out, you could be giving away far too much of your hard earned cash!
Computers & Equipment
Depending on what your business does, you may be able to write of any number of things. Any item that directly supports your business is fair game for deducting as a business expense. One thing that almost all businesses have in common today, though, is the need for a computer and printer.
As an online entrepreneur with a blogging, writing, and web design business, it is even more obvious of a need for what I work on. If you use your computer for bookkeeping, client email and communications, publishing a business website, printing and scanning contracts and invoices, and other administrative functions, you can write it off.
Paper, pens, printer ink, a desk, and other office supplies are another general category that most business owners can safely write off. For me, jotting down post ideas, interview notes, and keeping track of what I’m working on makes the need for office supplies pretty cut and dry.
Because the vast majority of my printing is related to customer contracts and business accounting, I can write off that expensive printer ink as well. And I need a place to work, so home office furniture used directly for work are fair to write of as well.
Internet and Phone
While most of us use home internet for Netflix, Facebook, and other fun, do you use your internet for business as well? I couldn’t do anything for my company without a high speed internet connection, so I write it off.
I also use my cell phone for business quite a lot. Because my business requires Facebook, Twitter, and other social network use in addition to email, a large portion of my mobile data usage is driven by business needs.
For internet and phone write offs, estimate what percentage of your use comes from your business. That is the portion of your bill you can deduct as a business expense.
One night in New Orleans earlier this year, new friend Holly Johnson from Club Thrifty and I walked up the bar to grab some drinks. I was buying a round for a few finance bloggers and when I got the $40 tab, I said, “at least I can write it off!”
Over the last four years, I’ve traveled to Chicago, Denver, St. Louis, and New Orleans for FinCon, the blogger conference for finance bloggers. For an event like this, you can write off your travel, hotel, rental cars, taxis, airport parking, and even meals, drinks, and entertainment expenses at the conference.
Travel expenses are very clear, but writing off meals, bar tabs, and entertainment is a bit of a gray area. The IRS has limits on what meals you can write off, and the idea is that you can write off meal expenses above what you would pay to eat at home in your own kitchen. Because I never eat alone at a conference and each meal is related to a business purpose, they can be more easily classified as a write off for my business.
Client Meals & Entertainment
If you work in an industry where client meetings are customary, you may find yourself picking up the tab for some business lunches or other meals. Just like my meals at the blogger conference, you can write these off, and you can write them off without much of a gray area at all.
Of course, you can’t take friends out to lunch and write it off as a business expense, but if it is a meal with a paying client, prospective client, or even a prospective business partner for a joint project, you can safely deduct the expense
If you take a class that will further your skills related to your business, you can count those costs as a business expense too. If you are taking a business management or accounting class to further your business skills, save money on hiring outside vendors, or building your business to grow even more, you are safe to count those as a deduction.
For other classes, they have to relate directly to your business. If you’re a photographer, you can write off a photography or Photoshop class. If you are a cook, you can write off cooking or food related classes. Artist? You can write off art classes that relate to your specialty. You get the point.
This one gets a little trickier. For a home office deduction, the general rule is when in doubt, do not write it off.
However, if you have a home office space that you use 100% exclusively for business purposes and don’t use for anything else ever, you can write off the cost based on the percent of square feet of your home. If you have a 100 square foot office in a 1,000 square foot home, you can write off 10% of your rent or mortgage. But be very cautious when doing this because it is a big red flag for IRS audits.
Only write off a home office if you are completely certain it will qualify.
Vehicle and Mileage
Writing off a car works similarly to writing off a home office. It pretty much has to be exclusively used for business purposes to count, and if your business vehicle is your only vehicle, it probably won’t count at all.
However, if you drive for business purposes, you can write off the mileage cost of driving any distance beyond your normal commute. For example, if you have an office 10 miles from home and have to drive 50 miles for a project, you can write off 40 miles at the standard IRS rate.
Depending on the type of small business you own, there are various types of business insurance you must purchase. The IRS generally allows you to deduct premiums on many business insurances such as liability insurance, commercial property insurance, commercial auto insurance, workers compensation insurance, malpractice insurance, etc.
You may also be able to deduct your health insurance premiums if neither you nor your spouse is eligible for health insurance through an employer and you pay out-of-pocket for health insurance with after-tax dollars.
Make Money Within 3 Years
One thing to keep in mind with all write offs is the line between a hobby and a business. In order to be classified as a business, you must actually make money.
Based on what I’ve learned, you have about three years to make a profit and start paying taxes or your business will be classified as a hobby. If that happens, as a worst case scenario, you may have to pay back the taxes you previously wrote off erroneously for your business. Best case scenario is that you just can’t write anything off in the future.
The IRS will only let you write off expenses if you are actually paying in taxes. If you have net loss each year, you might reconsider the business you’re in and try to find something that makes you money. That is the whole point of being in business in the first place!
How to Deduct Business Expenses
Now that you know what you can deduct, you need to know how to do it. Business income and expenses are listed in one of two places. If you have a registered business that requires its own tax return, such as a C Corp or S Corp, you deduct your expenses there. If you have a sole proprietorship, even one that isn’t registered with the government, or a single member LLC, you list the income and expenses on a Schedule C.
Schedule C is an add-on to your 1040, the primary personal tax return form you submit each year. You can fill this out by hand with a paper form, but it is much easier to just hire an accountant or just a program like TurboTax or H&R Block.
I’ve used an accountant since I was 16 years old, but decided this time to give it a shot on my own using H&R Block, which looks to be the best option for a small business owner filing a Schedule C, which includes most soloprenuers.
*Please note, I am not a tax professional and this post is just to get your ideas rolling. It is not tax advice and if you have specific scenarios for your business, please contact a licensed tax professional before you write off anything in question.
2 thoughts on “Can I Write it Off – A Practical Guide to Deducting Small Business Expenses”
I have kind of a dumb question. I have two sources of self-employment income (I only had one last year). One will be in the black this year and one will not. Do they ultimately get conflated on my taxes? Or will I have the opportunity to treat one as a loss and one as a gain?
Hi Emily, sorry for the very late response. This comment had slipped under the radar.
You can list each income source on a separate schedule C or combine them on one if you prefer if both sources are sole proprietorship income. If either is an LLC with a Federal EIN, it is probably a better idea to create a unique schedule C for each source.
My record is 3 schedule Cs in one year. Back down to two now since my DJ business is on hold.
Comments are closed.