Are you neglecting to deduct business expenses on your tax return?
It could be leaving money on the table. Whether you’re an established entrepreneur or starting a store, you can save thousands of dollars in tax deductions. So what 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 cannot cancel speeding or parking tickets. But don’t let this stop you from saving a lot of money on your tax return. Put those dollar bills back in 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 are obliged to buy stationery and advertising. But did you know that you can also cancel equipment repair, business calls, and office furniture payments?
However, there are limits.
- 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 fully deduct the costs of starting your business. Instead, you can deduct up to $ 5,000 the first year and pay the remaining start-up costs periodically over the course of 15 years.
- Every hundred you invest in your business is called a capital expense or current expense.
Capital expenditures are your purchases of business assets, durable equipment that will continually improve your business for years to come. Because capital expenditures typically do not wear off after the first year, these expenditures are depreciated and deducted over a period of time.
Current expenses are charges for equipment or services that are used every day to maintain a profitable business. They typically sell out in the first year, so you can deduct the full cost of ongoing expenses on your tax return.
- Repairs that add value to the equipment, extend the useful life or adapt an item to a different use can be deducted on your tax return.
- Advertising fees for creating promotional materials such as business cards and print, radio, yellow pages, and banner advertisements are fully deductible.
- If you use the phone regularly to call clients or customers, you can deduct the charges relevant to your business.
Be careful though: if you’re trying to mask personal purchases by claiming them as business expenses, you may be in deep water when your tax return triggers an audit.
2. Home office rental and fees
Do you work from home? Deduct a portion of your rent, insurance and utility payments if you have a dedicated business office.
There is a downside. Your office must be for business use only.
It’s okay to work in slippers, but you can’t take a home office deduction if your bed is in the bedroom unless your office is separate. You also cannot allow your children to play Legos in your workspace. And you certainly can’t watch TV in your office during downtime.
You should also use your office consistently to take advantage of the home office deduction. Feel free to call clients, bill clients, take notes, schedule appointments, meet with clients, request 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 have a daycare business or have a room set up for inventory storage, you can still take the deduction even if the room is not 100% used for business.
3. Automatic payments
Did you know that you can deduct the cost of gas consumed while driving to and from customer meetings?
Whether you own a real estate business, meet with clients regularly, or rent an office away from home, you can save hundreds of dollars on your tax return.
Do you use your car for business? You can calculate your deduction in two ways.
- Deduct at the standard mileage rate. If your regular business routine requires you to be constantly on the road, you may be able to save more by deducting a certain amount of money after each mile driven, along with toll and parking costs.
- Deduct actual expenses. If you occasionally meet with clients or your car uses more gas than average, you can save much more by deducting a portion of your gas, replacement tires, oil changes, insurance, and car registration expenses.
Always keep an organized record of your car use, and filing your federal and state income taxes will be as simple as doing some math.
4. Travel and entertainment expenses
Remember that vacation deal you bought just before your last business trip?
Cancel a part of your airfare, depending on how you spent your vacation. Part of your transportation costs qualify as a deduction if more than half of your trip was spent on business. The more time you spend on your business, the higher the deduction.
Did you need to pay for clean clothes while you were away? You can deduct laundry and dry cleaning expenses. You can also deduct transportation costs, lodging fees, tips, fax charges, and costs to send product samples and display materials.
Also, if you’ve ever hosted an event for your company in your office, restaurant, or elsewhere, you can deduct entertainment expenses that helped promote the growth or well-being of the business. Please note that only 50% of meals are deductible.
You can even deduct moving costs if you had to relocate your home due to work. However, if the move was not directly related to your business, you cannot claim the deduction.
5. Educational materials and professional fees
Have you bought a book to learn a skill that would directly affect your business? How about that copywriter you hired to create a sales page that would later transform a product launch into a massive success?
Business-related books, legal fees, and professional services are fully deductible on your tax return.
However, you are not just limited to books and independent contractors. If you pay an accountant or buy a tax program every year, you can deduct tax preparation fees.
Do you have a business with hired staff? You can reduce taxes by deducting wages, bonuses, and fringe benefits like health insurance and sick leave.
6. Bad debts
If you sell your own services, chances are you’ve run into an occasional problem customer. Your client may refuse to pay you for work done, reducing your profit margin for the month. You may have even loaned money to customers or suppliers, but the loan was never paid off.
Fortunately, this loss of income is fully deductible as long as you provide written documentation indicating the amount owed, the interest rate, if applicable, and the steps you took to collect the debt. If you can prove that you have made multiple attempts to get paid and the debt is uncollectible, you can write it off on your tax return.
Save your hard-earned money at the end of the year by keeping a detailed record of purchases and business-related activities. You can use financial software to help with this, but simply opening an Excel spreadsheet to record expenses as they appear works, too.
Separate payments into clearly marked categories and save time and money the next time you file your taxes.
7. The Hummer deduction
Has your business bought a car or a large machine recently? This can be turned into a great tax benefit by using “The Hummer Deduction”, also known as section 179 of the tax code. Learn more
Disclaimer: You should check with your tax advisor before following any of the ideas in this article. This article is a starting point to discuss with your advisor. I am not a tax professional and although I believe that what is in this article is true in general, it may not be true in your particular case.