Article Update – Jan 25th, 2023
If you are self-employed or run your own company, you can reduce your annual tax burden by writing off certain business expenses.
How to Write Off Business Expenses
- Categorize Purchases (Qualifying vs Non Qualifying)
- Add Up Qualifying Expenses,
- Add Total to Schedule C
What Are Business Expenses?
If you are an employee at a company, you more than likely won’t need to purchase anything out of pocket in order to do your job. In fact, the Fair Labor Standards Act (FLSA) prevents employers from charging employees for their own equipment—so long as doing so would reduce their pay below minimum wage. However, people who run their own businesses face a plethora of expenses that they must shoulder personally.
For example, someone running a retail store needs to buy inventory. Someone running a restaurant needs to purchase food. Someone running a childcare facility needs to purchase toys and play equipment. And many business owners need to hire help to run their business, whether that means full time employees or part time independent contractors.
Since these supplies are not for personal use, the IRS allows business owners and self-employed individuals to write these expenses off against their income. That means the business owner can subtract the cost of these expenses (or a portion thereof) from their total income, so the resulting amount creates a smaller tax burden.
Why Write Off Business Expenses?
In some instances, a self-employed individual or business owner may even be able to write off enough taxes to lower themselves into a more desirable tax bracket. When done according to the accounting rules and regulations of the IRS, this is perfectly legal. In fact, it’s illegal to avoid writing off certain expenses, since doing so can inflate the appearance of your income beyond what actually makes it to your bank account.
What Business Expenses Can I Write Off?
1. Self Employment Taxes
If your business is set up as an S-corp, you can deduct part of your self employment taxes. Since you are putting yourself on the payroll, what’s technically happening is that you and your “employer” (that is, your business) are splitting the FICA taxes, just as if you received a paycheck from a job. You can deduct the “company” half of these taxes as a qualified business expense.
2. Home Office Deduction
As previously mentioned, you can deduct a portion of your rent or mortgage as a home office deduction. The standard home office deduction will allow you to claim up to $1,500 per tax year as a deduction, while the area method and number of rooms method can allow you potentially claim more, provided you are truly using those rooms for business activities.
3. Business Travel Expenses
If you need to travel for business, you can claim a travel tax credit as long as your business trip was planned in advance and the majority of days involve business activity, such as meeting with clients, suppliers, partners, or investors. This rules out handing out a few business cards on your vacation to Hawaii and attempting to claim it as a travel expense, although it does not rule out combining business and personal vacation time in a way that meets IRS requirements.
In a similar category, you can also write off meals for 50 percent of the capital expense, provided that said meals are not extravagant or lavish. You will have to use personal discretion here, because a $500 dinner in a Manhattan restaurant may not be extravagant in some contexts. In any case, until 2022 you can actually write off 100 percent of the cost of a meal if it is related to conducting business.
Unfortunately, the Tax Cuts and Jobs Act of 2017 eliminated writing off entertainment expense, so if entertainment is connected to the meal (such as a dinner theatre experience), you will need to make sure the cost of food and drinks is itemized separately, otherwise you will not be able to claim a business deduction for it according to the 50 percent method.
4. Vehicle Expenses
If you use a personal vehicle for work purposes, you can deduct $0.56 for every mile driven while working, but not while commuting to and from your place of work (because commuting is not considered a tax-deductible business activity). However, if you conduct your work at several locations, you should be keeping track of mileage. Traveling salespeople, real estate agents, quality control managers, tutors, and delivery drivers should all be keeping track of all work-related mileage. While this is hard to do by relying on the odometer itself (unless you are constantly writing down your mileage at the beginning and end of your workday) there are apps that make it easier and can calculate the work-related mileage for you.
You can also use an actual expense method instead of the standard mileage rate. This is done by adding all car expenses (gas, oil, registration, car insurance, repairs, and even depreciation) and multiplying it by the percentage of total time you use your car. For example, a gig worker who spends $6k on their vehicle annually (between gas, insurance, maintenance, and depreciation) and uses their vehicle 50 percent of the time for shuttling customers around, can deduct $3k against their gross income. While the standard mileage rate is easier to keep track of, you may find that using the actual expense method yields a higher deduction.
5. Marketing, Insurance, Education, Memberships, and Subscriptions
Any expenses paid for marketing, advertising, insurance, education, memberships, subscriptions are a deductible business expense.
For example, if you own a restaurant and subscribe to an industry publication for the food business, you can write it off as a business expense. Facebook and Instagram ads are also deductible.
6. Retirement Contributions
You can also deduct retirement contributions. Recent changes to the tax code have made self employment 401(k)s much more attractive to business owners, as these investments can be written off as a business expense, and up to 25 percent of eligible personal income can be allocated toward the retirement account.
These self employment accounts have different names at different financial institutions, such as the Solo-k, One Participant k, and Individual k. Speak to a tax professional about your long term personal financial goals and how this particular tax credit might be beneficial.
Do you have a plan for retirement? If not, you may be missing out on valuable tax savings. Get your personalized retirement blueprint today when you schedule a free strategy session with one of our retirement planning experts!
How to Write Off Business Expenses
Now that we’ve given a few examples of business expenses that can be written off, let’s talk about how you can go about claiming these write offs:
1. Categorize Purchases (Qualifying vs Non Qualifying)
Before the calendar year begins, you should have an idea of which expenses can be written off as business expenses. You should also be using software to track your expenses.
As a best practice, using a credit card or debit card dedicated solely to business related purchases will make it much easier to conduct your accounting at the end of the year. This business card could be used to pay for your website, freelance contractors, social media ad credits, transportation taken to business meetings, and the hardware you use for your business (a laptop, for instance).
It’s important to keep in mind that not everything you use for your business is fully deductible. For instance, there are very specific rules around whether or not you can deduct a business trip—namely, the trip must be planned and the majority of its days must involve conducting some sort of business. You also cannot deduct all the gas purchases for a vehicle that is used personally, but you can deduct $0.56 per mile.
There are a number of different qualifying business expenses that can be deducted. Keeping track of your purchases throughout the year, even if it seems to be just nickels and dimes, can go a long way toward snowballing into a significant tax write off at the end of the year.
2. Add Up Qualifying Expenses
If you’ve kept track of your business expenses throughout the year, it should be no problem adding them up so you can deduct them from your gross income. Some accounting software, like Quickbooks, will do all of this for you. If you’re doing it the old-fashioned way by saving receipts, that’s okay too—you’ll just have to invest more time adding it all up when it comes time to file your taxes.
You might be wondering what constitutes as a business deduction for the tax year. There is an annual IRS publication that lists small business tax deductions and how they work. Every small business owner should familiarize themselves with these common business tax deductions so that they know which expenses to track.
3. Add Total to Schedule C
Once you’ve added everything up, you will list the totals on the itemized deductions on Schedule C found of Form 1040. This form is used for filing personal income taxes, whether you are employed, self-employed, or run a business as a sole proprietor or LLC.
It’s important to note, however, that if you have structured your business operations as a corporation, you will need to file a corporate tax return. The total amount of expenses for business purposes will be subtracted against your gross income to arrive at your adjusted gross income, which is the amount on which you will pay in self employment tax.
The self employment tax is 15.3 percent, which is higher than most people want to pay in terms of income tax. This is why many a small business owner chooses to structure their business operation as a corporation. In this structure, they put themselves on the payroll and pay themselves a salary so that they don’t need to pay the self employment tax on the entirety of their income, just a smaller portion.
Can Employees Write Off Business Expenses?
You can deduct workplace expenses accrued prior to 2018, but unfortunately you can no longer deduct business expenses if you are an employee (in most cases).
If, however, you are in the Armed Forces Reserves, a qualified performing artist, or have employee expenses related to an impairment, you can deduct certain items from your income. Only ordinary and necessary expenses can be written off. While this is also true for self employed individuals, employees have much less leeway for tax write offs than those who are self employed.
For instance, employees can no longer write off a home office tax deduction, even if they do work at home, whereas a self-employed individual can use the standard home office deduction (or a similar method) to claim a tax deduction.
It’s important to note that there are some states that do allow employees to write off unreimbursed business expenses on their state tax returns. If you’re employed, it doesn’t hurt to conduct a quick internet search and see what unreimbursed expenses, if any, you can claim on your income tax return. This is great news for working individuals who have to shoulder an actual expense as part of their profession. An example would be teachers who need to dip into their personal finances to purchase classroom supplies.
Educator Expense Reduction
Speaking of teachers and unreimbursed expenses, there are tax deductions at the federal level that are available for employees of an organization to use and reduce their taxable burden. The Educator Expense Reduction allows teachers to take a $250 tax deduction for single filers ($500 for a married couple filing jointly, if both taxpayers are teachers) to defray the cost of classroom supplies they have personally paid for.
Certain criteria must be met in order to take advantage of this tax deduction. You must work at a K-12 institution as a teacher, aide, counselor, or administrator for at least 900 hours in the tax year. Conduct an internet search to see which tax deductions are available for your profession.
Write Off Business Expenses to Reduce Your Tax Burden
For individuals who are self-employed or own a business, business tax write-offs are a wonderful boon from the IRS—allowing you to reduce your taxable income and pay less taxes.
While you can certainly track and write off business expenses yourself, working with a qualified tax expert who knows the ins and outs of business tax deductions can maximize the amount you save. This will significantly reduce your personal tax burden, allowing you to re-invest the savings into the business.
Don’t put off tax planning any longer! Schedule a consultation with an Anderson Advisor’s tax strategist today!
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