Are you neglecting to deduct business expenses on your tax return?
You could be leaving money on the table. Whether you’re an established entrepreneur or just setting up shop, you can save thousands of dollars in tax deductions. So which expenses qualify? To receive a tax deduction, business expenses must be necessary and typical for the type of business you run.
There are exceptions to the rule. You can’t write off speeding or parking tickets. But don’t let this stop you from saving serious money on your tax return. Place those dollar bills back into your wallet by adding these commonly overlooked business expenses to the list.
1. Costs to Keep Your Business Running
As you maintain your business, you’re bound to purchase office supplies and advertising. But did you know that you can also write off equipment repair, business calls, and office furniture payments?
There are limits though.
- If your business goes under, you can’t deduct costs for exploring a business opportunity. But you can deduct costs for products, materials, and supplies in your inventory.
- You also can’t completely deduct costs from starting your business. Instead, you can deduct up to $5,000 the first year and write off any remaining startup costs periodically over the course of 15 years.
- Every cent you invest into your business is referred to as either a capital expense or a current expense.
Capital expenses are your business asset purchases, long-lasting equipment that will continually improve your business in subsequent years. Because capital expenses normally don’t wear out after the first year, these expenses are depreciated and deducted over a period of time.
Current expenses are charges for equipment or services used every day to maintain a profitable business. They’re normally used up in the first year, so you can deduct the total cost of current expenses on your tax return.
- Repairs that add value to equipment, prolong the lifespan, or adapt an item to a different use can be deducted on your tax return.
- Advertising fees to create promotional materials like business cards and print, radio, yellow pages, and banner advertisements are completely deductible.
- If you regularly use the phone to call clients or customers, you can deduct charges relevant to your business.
Be forewarned though: if you try to mask personal purchases by claiming them as business expenses, you might be in deep waters when your tax return triggers an audit.
2. Home Office Fees and Rent
Do you work from home? Deduct a portion of rent, insurance, and utility payments if you have an office that is dedicated to business.
There is one drawback. Your office has to be exclusively for business use.
It’s fine to work in your slippers, but you can’t take a home office deduction if your bed is in the room unless your office is sectioned off. You also can’t let your children play Legos in your workspace. And you most certainly can’t watch TV in your office during downtime.If you do, your office won’t be considered exclusively for business.
You also have to use your office consistently to take advantage of the home office deduction. Feel free to call clients, bill customers, take notes, set appointments, meet with clients, order materials, or write reports in your office. But an office that you only use occasionally doesn’t count.
There are exceptions to the rule. If you run a daycare business or you have a room set up for inventory storage, you can still take the deduction even if the room isn’t used 100% for business.
3. Auto Payments
Did you know that you can deduct the cost of gas consumed while driving to and from client meetings?
Whether you own a real estate business, regularly meet with clients, or rent an office away from home, you can save hundreds of dollars on your tax return.
Use your car for business? You can calculate your deduction one of two ways.
- Deduct based on the standard mileage rate. If your regular business routine requires that you constantly be on the road, you might be able to save more by deducting a certain amount of money after every mile driven, along with toll and parking costs.
- Deduct actual expenses. If you occasionally meet with clients or your car consumes more gas than average, you can save a great deal more by deducting a portion of expenses for gas, replacement tires, oil changes, insurance, and car registration.
Always keep an organized record of your car usage, and filing your federal and state income taxes will be as simple as doing a few math calculations.
4. Travel and Entertainment Costs
Do you remember that vacation deal you purchased right before your last business trip?
Write off a portion of your plane fare, depending on how you spent your vacation. Part of your transportation costs is qualified as a deduction if over half of your trip was spent on business. The more time you devoted to your business, the higher the deduction.
Needed to pay for clean clothes while you were away? You can deduct laundry and dry cleaning expenses. You can also deduct commuting costs, lodging fees, tips, fax charges, and costs to ship product samples and display materials.
Moreover, if you’ve ever hosted an event for your business at your office, restaurant, or another location, you can deduct entertainment expenses that helped promote business growth or well-being. Keep in mind that only 50% of meals are deductible.
You can even deduct moving costs if you had to relocate your home because of work. If the move wasn’t directly related to your business though, you can’t claim the deduction.
5. Educational Materials and Professional Fees
Have you purchased a book to learn a skill that would directly impact your business? How about that copywriter you hired to craft a sales page that would later transform a product launch into a massive success?
Business-related books, legal fees, and professional services are all fully deductible on your tax return.
You’re not just limited to books and independent contractors though. If you pay an accountant or purchase a tax program every year, you can deduct tax preparation fees.
Own a business with hired staff? You can reduce taxes by deducting salaries, bonuses, and fringe benefits like health insurance and sick leave.
6. Bad Debts
If you sell your own services, you’ve likely stumbled across an occasional troublesome client. Your client might refuse to pay you for work performed, lowering your profit margin for the month. Maybe you’ve even loaned money to customers or suppliers, but the loan was never paid off.
Luckily, this income loss is completely deductible as long as you provide written documentation stating the amount of the debt, interest rate if applicable, and the steps you took to collect the debt. If you can prove that you’ve made several attempts to receive payment and the debt is impossible to collect, you can write it off on your tax return.
Save your hard-earned cash at the end of the year by keeping a detailed record of business-related purchases and activities. You can use financial software to help with this, but simply opening an excel spreadsheet to jot down expenses as they pop up works as well.
Separate payments into clearly marked categories and you’ll save both time and money the next time you file taxes.
7. The Hummer Deduction
Has your business purchased a car or a large machine recently? This can be converted into a large tax benefit using “The Hummer Deduction”, also know as section 179 of the tax code. Learn More
Disclaimer: You should consult with your tax advisor before following any of the ideas in this article. This article is a starting point for discussion with your advisor. I am not a tax professional and while I believe that what is contained in this article is generally true, it may not be true in your particular case.