What business expenses are deductible, and what’s not?

Knowing what expenses you can write-off in your small business can make a huge difference on your tax bill.

Whether you’re a real estate agent, freelancer, retail shop owner, or work-from-home mom–it pays to know what business expenses are deductible, and what’s not.

Owning a small business is what I call the “#1 tax shelter for the little guy”. You’re able to write-off many normal living expenses that W-2 employees cannot, including portions of your cell phone bill, vehicle expenses, rent and utilities, and much more.  

The federal and state tax codes are full of deductions for businesses, and you are entitled to take them whether you work your business from home or from a fancy outside office. In effect, you are sharing expenses with Uncle Sam–if you know what’s deductible, and what’s not.

But first… know the Big Picture.

Let’s make sure you know, ‘big picture’-wise, how the income tax system works for 1099 contractors and other small business owners. Uncle Sam taxes a business’s profit or ‘net income’—so the less you end up with after expenses, the less taxes you pay. What that means to you is this: you’re not taxed on gross receipts or your ‘top-line’ income. Your tax liability is based on your bottom line, or what’s left after deducting expenses. So the more you can deduct from you top line income, the better!

There’s a couple “gotcha’s” to watch out for:

  1. Big ticket items. While everything below is deductible, not everything listed below is deductible this year. ‘Big ticket’ purchases may need to be spread out (“depreciate”) over several years. In fact, it may be wiser to do so. Example, you could write off 100% of the cost of new computers and furniture this year (per IRS Code Section 179). But if your ‘bottom line’ net income is low (or if you have a net loss this year), then a wise strategy could be to defer that deductible expense to future years, spreading out the cost against future income, and thereby reducing your bottom line taxable income in those years.
  2. Start up costs. (ex., expenses incurred before you open for business, like advertising, equipment and supplies, licenses). You can write off the first $5,000 this year if it’s your first year in business, but you’ll have to spread the rest (“amortize”) over the next several years.
So here’s the list to keep as a handy reference at tax time. Many of these are overlooked self-employed business owners:

  • Accounting and Legal Fees
  • Advertising / Website
  • Auto and Truck Expense
  • Bank Charges / Credit Card Fees
    Commissions and Fees
  • Computer Expense
  • Consulting / Coaching Fees
  • Dues and Subscriptions
    Education and Training
  • Furniture
    Gifts
  • Home Office Expense
    Insurance
  • Inventory
    Janitorial Expenses
  • Licenses and Permits
  • Meals and Entertainment
    Office Equipment / Supplies
  • Postage and Delivery Printing 
    Printing and Reproduction
  • Rent / Storage
  • Repairs and Maintenance
    Retirement Savings
  • Software
  • Start Up Costs
    Supplies and Materials
  • Taxes (Sales, Payroll, Property)
    Telephone
  • Tools and Small Equipment
  • Travel
    Uniform Expense
  • Utilitiies

 

 

IRS Publication 463 “Travel, Entertainment, Gift and Car Expenses” is a must-read if you are doing your own tax preparation. It definitely pays to know the (IRS) code rather than assuming something is deductible when it comes to these areas. 

ANCHOR ON THIS: The more you know, the more you’ll save. But it may pay to hire a tax professional for even bigger savings. You’ll usually save far more in taxes than you’ll spend in his or her fees. Tax accountants know the changing IRS rules, prepare hundreds of returns each year, know what to look out for, and can help you avoid mistakes that might otherwise lead to a costly IRS audit. 

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