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First, you might be wondering what the heck is a tax deduction?!
Or more commonly known as a “write-off”. Here’s the thing, a lot of people get this wrong, including David from Schitt’s Creek.
(Also, we need to get this out of the way before we continue. Every business is different and if you want to actually get our eyes on your business and give you some customized tax advice, book a call with us. This article should not be construed as tax or legal advice, and of course, you should check with your own financial team to see how you should apply the strategies below to your own situation.)
“Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. In some cases, you may not be allowed to deduct the expense at all. Therefore, it is important to distinguish usual business expenses from expenses that include the following: the expenses used to figure cost of goods sold, capital expenses, personal expenses.“
Now for a normal people definition:
Your business can generally “write-off” anything you spend money on for things that you purchased to run your business. (We have a list of some examples below for you)
That’s it. And it doesn’t need to be more complicated than that. If you bought it for your business, make sure your tax preparer knows about it so they can let you know how to write it off.
Write-offs DO NOT mean free money. It simply allows you to pay a smaller tax bill, NOT avoid paying for it all together.
These business expenses that you write off are all added together and then deducted from your total amount your clients paid you, and that leaves you with your business taxable income for the year. (Unless you are a C-Corporation, which is taxed differently) That business taxable income gets added to any other household income you have, like your spouse’s job, and then you get to take other personal “write-offs” that mostly revolve around having kids. So that net number is your Household Taxable Income and that’s what you pay tax on.
Here’s the same thing in formula format – because we love those:
Your Business Revenue (What your clients paid you)
– Any Business Deductions
= Business Taxable Income
Any other household income you have (your spouse’s W2, rental properties, etc)
– Any Personal Deductions (everyone gets a standard deduction and then there are others you can take that are these mostly centered around your kids)
= Household Taxable Income
Your tax rate is then applied to your Household Taxable Income to determine what your tax bill will be.
So that means that if your spouse makes a high wage on their W2, the taxes your business pays will be higher since you pay taxes as a household. So, when you are calculating your taxes you have to take the whole household into consideration.
And before we continue. Truly, our most important tip (in order to claim ANY deductions) would be to keep good records and have up-to-date and accurate bookkeeping.
Sidebar: there is SO much fear and bad information out there about the IRS and how they operate. We talk with business owners everyday who are afraid to take deductions for things that they legitimately purchased for their business because they are afraid of the IRS. If you are purchasing things that are reasonable for the size & structure of your business and you can show how you used it to operate & grow your business, it’s totally fine to take those deductions. The IRS police are not going to come bust down your door and come after you. This doesn’t have to be scary. If you think money you spent should be a deduction, send it to your financial team.
And, let me also say – if you have a financial team that’s telling you that they can help you figure out how to “write off everything” – I would be wary of that, it’s generally bad advice. While it’s true that there are many creative things you can do to structure things so they can be deducted, it’s just not possible to write off your whole life. Just take the deductions you should, pay your tax bill and quit stressing over it & spending time looking for every single loophole to avoid paying taxes.
Did you know? Your tax advisor can give you very aggressive write off advice and recommend things to you – and your signature on that tax return means that you are approving everything as it’s filed. You are the one that is completely responsible for that tax return. Unless gross negligence can be proven (which is super rare) that tax advisor doesn’t have any repercussions for recommending deductions that you shouldn’t actually take.
You are ultimately responsible. So if it smells fishy – go hang out in another pond and find a fishing partner who you trust is giving you good advice – not just showing you how you can “pay $0 in taxes”
The More You Know. Commercial Break.
OK – so back to the business expenses conversation…
Here are some things that ARE NOT deductible (even though maybe you think they should be):
Paying for a babysitter while you work (because #patriarchy – get back into the kitchen, lady). We will give you a tip how to claim this though.
Nails & Hair & Wardrobe. Even though we know you are rocking your branded hair on IG Stories and needed that new outfit for an event. The old white men at the IRS don’t understand social media. Remember when Zuckerburg testified in front of congress and the dudes didn’t understand anything. “We run ads, sir”. The tweet mockery afterward had us laughing for days.
Ok all joking aside, the tax laws really aren’t written for modern online businesses. Don’t worry. We will interpret how the IRS Guidelines apply to YOUR business, and give you some realistic advice on how you can structure things so that maybe you can take them as deductions.
So what are some things you can deduct? Here is a list of some common deductions available to most businesses. Of course – there are specific guidelines, requirements, and exceptions to each so make sure you have that convo with your financial team about YOUR specific business. And if you are overwhelmed with this – Don’t worry. Just think about anything you purchased to run or grow your business, or that your business benefited from. If you have things you aren’t sure about, that is where your tax advisor can help.
Common Deductions Available:
Advertising and Promotions (sending cards to clients, business logo design, working on your website/rebrand, photoshoots, etc.)
Business Meals (this does NOT mean your everyday lunch at your desk, even if you are eating while you are working. So you might as well go eat outside and get some fresh air! These business meals are usually the ones you pay for during events or meetings (virtual or in person).
Business Insurance (Health insurance wouldn’t be included here, it’s treated differently – but your business liability policy can be deducted)
Business Interest and Bank Fees (service charges, transfers, overdraft fees, interest on your business loan or credit card)
Business Use of Your Car (driving to the airport for business travel, driving to local networking/events. If you do drive for your business, check out more details below)
CEO Payroll (Depending on your business structure, your business can take deductions for your CEO payroll checks, making contributions to your retirement account, and other benefits.)
Education (classes, webinars, workshops or books)
Home Office (You can take a deduction for the portion of your home that you use exclusively for your business – check out more details below)
Legal and Professional Fees (accountants, bookkeepers, lawyers)
Merchant Fees (The costs for receiving payments from your clients, with Stripe/PayPal, etc. Even if they are deducted before the balance is deposited into your account you will want to keep track of these)
Rent (For a separate office, or a co-working subscription-style office. This can’t be rent on your home even if you use it for an office – I know, somedays it feels like your whole house, including your kitchen counter IS your office. 🤔)
Software (there are likely a lot of software subscriptions you are using to manage your online business, include all of them in your expenses)
Taxes and Licenses (business licenses & business taxes you may have to pay in your state – check out more details below on how tax payments work)
Team Costs (Whether contractors or W2 employees, you can deduct everything paid to them, including many benefits and the payroll tax expenses and payroll software fees)
Telephone and Internet (You can include your whole cell phone bill – not from your family – and a portion of your internet as well)
Travel (there are lots of guidelines here, but many trips can be business even if there’s some personal time thrown in – so talk with your tax advisor on how to be strategic here)
We often get questions about a few other things that we wanted to address as well since they are handled a bit differently from a regular business expense deduction.
Car Expenses (Most of us with business based at our houses aren’t going to have much in the way of vehicle expenses. Driving your car while you have client calls doesn’t make the car a tax deduction (yes, add that to the list of #badtaxadvice we have seen) But, if you are driving to see local clients, attend networking events, to the airport for a business trip, to the post office & office supply run, you can definitely take those as a deduction. For our type of business purchasing a car through your business doesn’t make sense because it would have to be used just about only for the business, and the business use isn’t high enough to justify the higher costs for having a business vehicle. So, keep a mileage log of the total miles you drive, the date, and the purpose of the trip, and then give that to your tax advisor so they can include those deductions. You will receive more than 55 cents per mile, so it can give you a nice write-off if used properly – or a nice audit flag if you do it wrong. 🙂
Charitable Contributions (The company can’t deduct these directly unless it is advertising-related. You can still make the contribution from your business, but it would be deducted on your personal return – if you qualify. So – you won’t necessarily be able to take this as a deduction. So, still support your favorite organizations, of course – but don’t do it for the deduction!)
Child and Dependent Care Expenses (If you pay a licensed provider for daycare, summer camps, after-school care, etc. you may receive a small credit (small compared to the overall cost, we know, but helpful nonetheless) on your personal return. Nothing related to childcare expenses should be paid from your business. We know – you need childcare to be able to think for a minute about your business without being constantly asked for snacks. We get it – the IRS doesn’t.
Health Care Costs (Doctors, dentists, co-pays, massages, acupuncture, etc.) are only deductible if they add up to more than 7.5% of your income, and then you only deduct the amount above that. So you have to have substantial health expenses when compared to your income in order to maybe even be eligible to deduct these. So unless you have major out of pocket costs, these aren’t worth keeping track of. And they shouldn’t be paid from your business – even though – we know, the healthier you are, the better your business runs. Again the IRS doesn’t care about that. If your business is in the health care field, there may be some ways you can write off some things as business expenses as research but you will need to talk with your advisor about those)
Health Insurance Depending on how your business is structured, this is going to vary – but if you are self-employed and you pay for your own health insurance you can write this off. If you are covered under your spouse’s group health plan, even if they pay for a portion of it out of their payroll checks, there’s no deduction offered for this.
Home Office If you have a room in your home that you use exclusively for business then you can take a deduction for the costs of running your home. Here’s how that works – you calculate the total square footage of your office and then the total square footage of your home, and divide to get your home office percent. Then you can total up your rent or mortgage interest, real estate taxes, homeowners or renters insurance, utilities, repairs, and maintenance costs and then apply the home office percentage to those to get your deduction amount. The IRS also recently created a standard of $5 per square foot (up to 300 sq ft) so you can take that without having to do any of the above calculations. If you live in a home you will be selling in the future, doing the first calculation could result in a higher deduction, but there may be adjustments when you sell your home, so talk with your advisor to weigh those options.
If your office is a table in the living room where you are also watching the kids, because daycare is closed again, sorry. No deduction. I feel ya, mama.
None of the costs for running your house (rent, utilities, etc should be paid directly from your business.)
Home Office Furnishing & Remodeling If you buy a new chair, computer, paint the room a new color, etc you can take those all as full deductions from the business instead of including them in the above list of home office costs.
Moving Expenses Moving is never a business or personal tax deduction (unless you are military, in which case certain qualifications must be met)
Retirement Contributions Retirement contributions may be able to be funded from your business, personal, or both. There are lots of options here, and can be a great tax deduction – but remember that any money you put into a retirement account is pretty locked up until retirement, so this should be looked out with your overall cash flow & financial goals.
Tax Payments Taxes (unless you are a C-Corporation) are not a tax deduction even though it feels like they should be since you had to pay them because of your business. If you are lucky enough to live in a state that has an additional business tax (CA, NY + others) then those business taxes are a deduction and can be paid from your business, but the other taxes that you pay with the filing of your tax return should be considered personal expenses. That means they shouldn’t be included in your business expenses, and should be paid from your personal bank account. We do Profit Planning with our clients to save for taxes, and then recommend transferring that cash to your personal bank account and making the payments from there to keep things clean.
A final (very important) note on taxes:
The messaging out there is that taxes are confusing, complicated, expensive and a general pain in the ass. You get to decide if you want that to be true in your business. It doesn’t have to be. Taxes can be just another bill you need to pay periodically in your business without the drama. Just like any bill you pay, you don’t want to pay more than you need to, sure – but you don’t spend hours & hours of your life searching for ways to make it lower.
Work with a professional you trust and can have conversations with and ask questions without fear of judgment. Know the amount you will owe, Profit Plan for it, and pay it. The end.
How would things feel different if that was how you handled taxes in your business and in your life?
Our goal is to work with you to break all this down into terms you’ll actually understand and support you by suggesting the best strategies and deductions for your specific business.
Please don’t just Google & go with it – reach out to us for support.