Tax Thursdays! Seven Small Business Tax Write-Offs

Welcome to the FreshBooks Tax Thursdays series! We know a lot of small businesses struggle with taxes, so we’re hoping to help make it a little easier by featuring advice from leading accounting professionals every second Thursday from January to April. Today CPA Chad Shultz walks us through tax write-offs for small businesses in the US.

As an owner of a small business, staying aware of the day-to-day operations of the business is a priority. At this time of the year, however, an owner must also be considering tax strategies for the business and write-offs are key for helping reduce the amount of income tax you need to pay. In light of this, here are 7 essential things to know about writing-off expenses and some common mistakes to avoid:

1. Car Expenses

Using a vehicle for business is quite common; when filling out your return, you will need to calculate the cost of this expense using either the Actual Expense Method or Standard Mileage Deduction.

The Actual Expense Method allows the taxpayer to write off actual out-of-pocket costs plus depreciation if he or she owns the car. Examples of expenses include Depreciation, Licenses, Tires, Loan Interest, Tolls, Gas, Oil, Towing, Insurance, Parking Fees, Registration Fees, Lease Fees, Repairs and Garage Rent. Keep in mind that parking and traffic tickets are not deductible. Also, if the car is used for personal and business, then a percentage of use needs to be determined and the business percentage is what the owner uses for the business write-off.

If you opt for the Standard Mileage Deduction, then track the business mileage and multiply that the IRS rate (i.e., $ .555/mile – July 1-Dec. 31, 2011); the total is the deduction.
To track you might use a mileage log or a smartphone app. An example of a business mileage log includes: Date, Destination, Business Purpose, Odometer Start/Stop and # of Miles. Auto expenses are also tracked with the type and amount spent (i.e., toll).

2. Travel Expenses

Airfare is deductible but if the taxpayer uses frequent flier miles to purchase a particular ticket, the cost of the airfare cannot be deducted. The taxi from the airport to the hotel, as well as transportation costs to go to a customer, including bus and limo costs, lodging, and meals (food, drinks, tax and tip) qualify. Other deductible items include the reasonable cost of cleaning/laundry, tips to the taxi driver, meals, bellhop, telephone costs to your office, receiving a fax, and computer/cell phone rental. These are based on actual costs and not per diem travel rates.

3. Business Gifts

You can deduct up to $25 per person per year, so keep in mind that if the business owner purchases a $30 bottle of wine for a client, only $25 is deductible. Some people also get confused with “gifts” vs. entertainment. If you give someone a ticket that costs $20 to a ballgame as a gift, then you can deduct this. If, however, you code it as entertainment, it may be subject to the 50% rule, making it a $10 deduction.

Make sure receipts are kept for any of the gifts, expenses with notes, showing the date, the person the purchased meal/gift is for, purpose of meeting/gift, and any other pertinent information. Suggestion: scan their receipts, since most receipts are on thermal paper that fades.

4. Repairs

The cost to repair business equipment or property is deductible, but be sure you make the distinction between “repair” and capital items. For example, if you replace an air compressor in the business air conditioner, that is considered a repair vs. adding a new air conditioning unit, which is a capital item.

5. Rent

Rent expenses are deductible, along with other terms of a lease (i.e., property taxes.). Many make January rent payments in December. If the business is using cash basis, then it will be deducted with the current year. If the business uses accrual accounting, then it must be capitalized.

6. Advertising

Deductible advertising expenses include business cards, print/radio/TV ads, yellow page advertising, package design costs as part of advertising campaign, billboard rental fees and signs on the side of cars/trucks, and PR expenses, including fees, event fees and costs of press kits.

7. Small Expenses (that can add up)

Dues and Subscriptions: Dues for professional, business or civic organizations are deductible (i.e., American Bar Association, American Marketing Association), Chamber of Commerce and Rotary. However, athletic, sporting, airline or hotel membership costs are not, even though they are business oriented. Business and professional publication subscriptions are deductible.
Legal  and Professional Fees: These fees, which include legal, accounting and tax prep, and appraisal fees, are deductible.
Bank and Merchant Fees: Bank-related fees, such as monthly, ATM and online banking costs, as well as merchant service fees, including Pay Pal related costs, are deductible.
General Office Expenses: Office supplies, postage, books, cleaning/janitorial services, flowers and  plants, snacks and beverages, are all deductible.

For specific information about tax write-offs for your industry visit the Small Business website, where you’ll find information that IRS agents use for examining returns. Another resource is the IRS’ Self Employed Individuals Tax Center.

– Chad Shultz, CPA

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  • Brenton Nallie

    My biggest problem is tracking those small expenses. I always forget to save the receipt or mark it down…. :(

  • Austin Ruhoff

    Business gifts?! I never thought of that. Great idea!

    Austin Ruhoff

  • Lorenzo C.

    Awesome list. It was a reminder about merchant fees. I also use others including Google Checkout and Stripe.

  • Loretta

    I love you Freshbooks. This is such a huge help.

  • Nathan Stephens

    Great information. You should add some share buttons for Facebook, Google+, LinkedIn etc. This is a great post, it was be very easy to share it if you included share buttons.

  • Heike

    Thanks so much for this! I found it very helpful. Keep the articles coming.

  • Danny Dang

    Not looking forward to tax season, but great info to keep in mind!

  • Lynette Hammond

    Helpful but as I am a UK user of Freshbooks it would be great to know if this is relevant in the UK.

  • John Coates

    Hi Lynette,

    Most of these are relevant to the UK, as most countries follow the same accounting principles. There are some differences though, so it is best to talk with a UK specific tax accountant.

  • Courtney Kostelecky

    Nice article. As an internet marketer/SEO person, one thing that most people might overlook is if they spend advertising dollars online, like google ppc.

  • Anders Bohea

    Hi, do you guys do anything for your UK customers on tax issues etc


  • Anders Bohea BoxChilli media Portsmouth

    Or is there a section for uk customers?

  • Rachel Hedley

    Although the tax write off principles are similar in the UK, they aren’t exactly the same and it would be good if you could provide specific advice for your UK users. It would make a great system even better. Happy to help write and deliver the content for you!

  • John Coates

    Hey Rachel,

    I’d love to chat with you. Thanks for reaching out. I’ll send you an email so we can arrange a time.

  • David

    I have been on 1099 this year and I relocated and will continue to work at my employer in 2012.

    I have a home out of state and I maintain a license from my home state and I am paying taxes to my home state.

    Can I write off the cost of rent here in the other state on my 2011 taxes for the last 6 months of 2011 since relocating as I still own the other home as my primary residence?

  • Ben

    Very handy!

  • Liz

    Hi, thanks for the article–
    You are writing from Canada……… correct?
    im in california, and our tax laws for small biz are different than the other states, from what I have heard… Do you know anyone who can help with this? Specifically sales tax, well and everything else %^)

  • http://LeadingtheWay Cathy Thompson

    FreshBooks … what a great Canadian success story. Glad to see your client offerings continue to grow.
    I noticed the author suggested a IRS site to visit for more info. How about a little Canadian resource content ….eh!

    Keep up the great work FreshBooks.

  • SHU Books and Taxes

    This is a GREAT article. I am still within my first year as a business owner so these tips are just what I need to know. Although I do personal taxes, my small business clients ask me questions along these lines so it’s a great set of facts to have available to them!

  • Rob Eberhardt

    Good info. Too bad most commenters are just using comments for SEM links :L

  • Denise

    I am in business for the first time selling Premier Design Jewelry. They file all the sales tax for us so I merely have to keep track of all my expenses. This list really helped out. I never considered my ATM or online banking fees and was not aware of $25.00 gift write-off. Glad I have an envelope of receipts I saved just in case I needed them!!!!! Thank you!

  • Air conditioning repair roches

    Interesting Post, Could you give me some more updates about Air conditioning repair