Expensing: What you Should, Must and Never Expense Come Tax Time

As a small business, you rack up a lot of expenses during the year. Luckily, many of those expenses can be used as deductions to reduce or eliminate the amount of money you owe the government in taxes. What you can claim as a deduction changes all the time, so having a tax professional nearby for advice is a good idea. And, just like all the things you can deduct, there are also things that can’t be claimed. How do you know for sure? Be sure to get a list of deductable items from your tax preparer and take a peek at the deduction do’s and don’ts below:

Bad Debts

No matter what business you’re in, there comes a time when you don’t get paid. Uncollected fees may be deductable.

Do Deduct: Unpaid cost of goods sold. If you sell a product, you may be able to recoup unremitted cash on goods never paid for. Stiffed by a wholesale or consignment deal? Have a client that bounced a bad check and never remitted fruitful payment? Keep track of these situations and others that result in money lost on goods sold, for a possible deduction.

Don’t Deduct: If you operate a service or freelance business such as web design, copy writing or other non-product services, you may be out of luck. Services may not be able to recoup fees on money not paid by a client. Keep track of any unpaid client fees and check with your accountant to see if they are tax deductable.

Home Office

If you run your business from your home, you may get a tax break. The IRS has specific rules for claiming home office space, however.

Do Deduct: Deduct square footage amount of your home that is used exclusively for business. You may also be able to deduct utilities, like heat and electricity and a percentage of your home owners insurance. Measure your work area and divide by the square footage of your home. That percentage is the number your accountant will need to know to make a deduction.

Don’t Deduct: You won’t be able to deduct space in your home used for a combination of business and personal use. For instance, if you share a home office space with your children as a place to play or do homework, it likely isn’t deductable.

Office Equipment

You can deduct expenses related to running your business, including equipment and supplies. Be sure to keep receipts for all office supplies and equipment you purchase throughout the year for proof of expenses.

Do Deduct: Keep track of all the supplies you purchase for your business. This includes printer paper, ink or toner, pens and pencils, binders and anything else you need to help your business run. Also include the cost of equipment, like a new computer, scanner or printer which will be used for business.

Don’t Deduct: If you share office supplies or equipment with your family, don’t expect to be able to deduct the entire cost. Your tax preparer may advise that you split the cost between business and family, and deduct the business portion. For instance, if you purchase a new computer and it’s used for both your business and your kids’ homework, only ½ of the purchase price of the computer may be deductable. If possible, purchase separate supplies for both home and business, and keep receipts for both.

Business Travel

If you’re planning on taking a business trip, you’re in luck with deductions. Costs associated with business travel are beneficial expenses come tax time.

Do Deduct: The cost of business travel can be claimed, including the cost of plane tickets, hotel and meals, car rental and more. Travel and room and board expenses are usually 100% deductable, while fifty-percent of meal costs are deductable.

Don’t Deduct: If you combine business travel with a personal vacation or bring the family along, you may receive a lower deduction. Be careful about claiming meals and travel expenses that are not strictly business in nature.  Keep receipts separate for both family/personal expenses and business expenses while on the trip.

Auto Expense

If you use your personal vehicle for business, you may be able to deduct mileage and vehicle insurance.

Do Deduct: Keep track of all the miles you drive to complete business tasks. This includes trips for supplies, meetings, trips, post office runs and more. To make it easier, keep a small notebook in your vehicle and write down mileage every time you go somewhere business-related.

Don’t Deduct: Don’t forget to separate miles driven for business from those driven for personal. If you haven’t been good at keeping track, don’t try to fudge the numbers. Your account may advise taking the total number of miles driven and splitting the difference, or getting as close as possible to a reasonable number of business miles for the tax year.

Continuing Education

If you run a business in a field that requires professional updates or continuing education, you may be able to deduct expenses related to ongoing learning.

Do Deduct: You can deduct costs associated with continuing education as related to your business. This includes conferences, college courses, seminars and other types of education that help you stay current in your field of business. You may be able to deduct attendance fees, miles and travel expenses and meals.

Don’t Deduct: Continuing education that is not related to your job or business may not be deductable. If you run a business, but are taking college courses to obtain a degree or advanced knowledge in a field separate from your business, you may not be able to claim expenses for those educational experiences.

Professional Fees

Professional fees can include a multitude of things, from association fees to apparel and accessories. If in doubt, keep track of any fees or expenses you may consider professional for your tax preparer to decide.

Do Deduct: Professional fees can include industry magazine subscriptions or journals, dues for professional organizations, like the Chamber of Commerce, or another professional group. If you belong to an organization that directly benefits your business, it may be deductable. You may also be able to deduct professional expenses, like clothing or uniforms as related to your business. Clothing with your professional or business logo or name on them are considered business-related and are usually deductable.

Don’t Deduct: You may not be able to deduct costs associated with belonging to organizations that don’t directly benefit your business. Professional expenses that can overlap into personal expenses, like business suits and shoes, may not be deductable, even though you may need professional attire for business meetings. Be sure to talk to your tax advisor about what professional expenses can be deducted if you’re not sure.

Overlooked Items

It’s easy to overlook everyday deductions. There are so many, it can be overwhelming to know what is deductable and what isn’t.

Do Deduct: Keep track of every expense even possibly related to your business. Common overlooked deductions include:

  • Bank charges
  • Taxi fees
  • Business consultant fees
  • Postage
  • Computer repair
  • Tips and gratuity for business meals
  • Parking or meter fees
  • Business gifts/gifts for clients

At the time, a particular purchase may be a questionable deduction; however, your tax preparer may suggest you claim it. Every little bit helps when it comes to staving off a huge tax bill!

This post is not meant to be professional tax advice. Remember to always consult with a tax professional if you have any questions about taxes!

Sign Up for Outright