A Simple Guide to Write Offs for Small Businesses (2018 Edition)
Business write offs are deductions from a business’s earnings. For income tax purposes, write offs are business expenses that are subtracted from revenue to find total taxable revenue. For example, a freelance interior designer can claim car mileage as a tax deduction since she needs to travel to meet clients.
In this article, we’ll cover:
- What Are Business Write Offs?
- How Do Business Write Offs Work?
- What Expenses Can I Write off for My Small Business?
- Business Write Offs for Sole Proprietor
- Business Write Offs for LLC
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Are Business Write Offs?
Business write offs are expenses that are essential to running your business and can be claimed as tax deductions. These expenses are subtracted from revenue to figure out total taxable income for a company. The more expenses a small business owner can claim as write offs, the less tax they likely have to pay.
That said, to qualify for write offs a business must be run with the purpose to make a profit; it can’t be a hobby. Most for-profit business expenses are at least partially deductible.
The IRS further clarifies: “To be deductible, a business expense must be both ordinary and necessary.” Simply put, the expense has to be common to your industry and helpful for your line of work. Still, the expense doesn’t have to be absolutely indispensable to be considered necessary.
Example: Ordinary Expense
A life coach writes off her business cell phone bills. Taking calls from clients is a common practice in life coaching, so a cell phone is considered an ordinary expense.
Example: Necessary Expense
A handyman prints fliers advertising his services and posts them around target neighborhoods. The handyman can expense the cost of printing these fliers as this marketing tactic will help his business succeed.
However, if a handyman produces an extremely expensive TV commercial advertising his business and then tries to expense the costs, he might be turned down by the IRS. After all, such an over-the-top marketing campaign isn’t necessary for his business’s success the way flyering is.
Personal vs. Business Expenses
Personal, living or family expenses can’t be written off as part of a business’s taxes. On the other hand, a small business owner can expense a purchase that has both personal and business uses, according to the IRS. The owner must divide the cost between personal and business and then write off the business proportion.
For example, if you want to expense your home internet you need to figure out how much you use it for business. Here’s one method: if you work 40 hours a week, that’s 160 out of 672 hours in a month or 24 percent. For an internet bill that’s $62 per month, you could expense 24 percent or $14.88.
How Do Business Write Offs Work?
Business write offs are included on annual income tax returns. Every business needs to file an annual income tax return.
The exception is partnerships, which need to submit an information return. Different business structures need to use different forms to file their income tax; the IRS lists the forms needed for different structures here.
For example, a sole proprietorship is an unincorporated business that is owned by one person. Sole proprietorships report their business income and claim write offs on Schedule C of their personal tax return.
In order to properly categorize expenses, it’s a good idea to make expense categories in your accounting software based on common expenses or deductions offered by the IRS.
Common expense categories include:
- Car & Truck Expenses
- Education & Training
- Employee Benefits (such as health insurance)
- Meals & Entertainment
- Miscellaneous (such as bank fees or wages)
- Office Supplies & Postage
- Rent & Lease
Remember: keep backup documentation for all business expenses, small or large. Businesses can’t rely on entries in their bookkeeping software. Even bank statements aren’t sufficient. You must keep all your receipts and records of purchase, whether physically or digitally. This will prepare you if your business is audited by the IRS, as they may ask you to prove the deductions claimed on your tax return.
You need to keep these records for three years after you file your return, though this can be extended to seven years if the IRS thinks you’re not reporting all your income (and if this unreported income adds up to more than 25% of gross income on your return).
What Expenses Can I Write off for My Small Business?
It’s important to know what expenses you can write off for your small business in order to decrease the income tax you owe—or even increase your refund! Here are some of the most important small business write offs:
There is a home office deduction for freelancers and small business owners who work from home.
That said, you can’t claim your entire house or apartment’s rent or mortgage. You need to calculate the amount of space you actually use to run your business—like a room dedicated as a home office. The IRS offers a standard deduction of $5 per square foot of your home used for business purposes (up to a maximum of 300 square feet).
You can also deduct home-related expenses like real estate taxes and mortgage interest according to the percentage of your home used for business purposes. So if 10 percent of your home is devoted to your home office, you can write off 10 percent of your real estate taxes.
The IRS has two options to expense your personal car for business use:
- Expense the mileage. The standard mileage rate for 2018 is 54.5 cents per mile, according to the IRS. Track your mileage on paper or via an app and write it off on your taxes.
- Expense actual car expenses. Car-related expenses like gas, mileage, repairs, vehicle insurance and vehicle leasing can be written off. You’ll still need to track your mileage for this option as this determines what percentage you’re using the car for personal versus business purposes (and what percent of your gas you can write off as a result).
Your employees’ wages can usually be deducted as well as gifts, bonuses and benefits like vacation pay and health insurance. Since employee costs are often a company’s biggest expense, this may be a big relief.
Businesses can deduct contributions to their employees’ retirement plans, as well as plan administration fees. Owners can deduct their own contributions as well.
Interest you have to pay on business loans can be expensed.
You can actually claim some federal, state, local and foreign taxes as business expenses, as long as you can prove the taxes were paid on behalf of your business.
Any insurance required to run your business, whether it’s car insurance, life insurance or health insurance, can be deducted.
Business Write Offs for Sole Proprietor
A sole proprietorship is a business structure where one person owns the company, which is unincorporated.
Here are some common write offs for sole proprietors:
- Education: This can include in-person conferences or workshops, online courses, coaches or how-to books. The skills you’re learning must apply to the field of your business; you can’t expense anything not related to your current industry. To prove the expense is related to your business, keep a copy of the course description or the materials.
- Subscriptions: They can be digital, like apps for social media management, cloud storage, cloud accounting software or productivity apps. Or they could be traditional subscriptions to trade magazines. If you pay for any of these expenses with a personal credit card or bank account, consider switching them to a business card or account so you can more easily track these expenses come tax time.
- Internet and Cell Phone: It’s up to you to estimate what percent you use these items for business purposes.
- Car and Truck: Log your miles on an app or on paper. You can either write off the miles used for business or use them to calculate what percentage you use your car for business purposes.
- Payment Processing Fees: Payment transaction fees from the likes of PayPal and Square can be expensed. At the end of every year, print out an account history from each payment processing system you use and add up those fees to write them off.
- Downloads: This can include stock photos, fonts, or any other business-related downloads. Again, make sure to buy these products with your business debit or credit card so you remember to expense them at tax time.
Business Write Offs for LLC
A limited liability company (LLC) can claim write offs that are specific to incorporated businesses and that unincorporated structures like sole proprietorships can’t claim.
If you created your LLC in the last tax year, you can write off the fee your state charged you to file the formation documents. You can also write off the cost of hiring a service to form the LLC for you, if you chose that route.
Other startup costs can also be expensed, as long as they were paid for before the business was formed. This could include:
- Wages for employees in training
- Market analyses
If you don’t want to deduct these expenses over the first year, the IRS will let you deduct them over an 180 month period (called “amortization”).
LLCs also qualify for certain tax credits from the IRS—they’re not write offs, but they do work the same way by reducing taxable revenue. There are tax credits for businesses that use alternative vehicles like electric cars and also for employee expenses like Medicare taxes and social security.
Common Questions Related To “What are Business Write Offs?”:
Can I Take the Standard Deduction and Deduct Business Expenses?
No, you cannot take the standard deduction and then deduct business expenses. The standard deduction can’t be claimed if you itemize your deductions—which a business owner needs to do to claim business expenses. Also, not everyone qualifies for a standard deduction and other people qualify for only a partial standard deduction.
The standard deduction is an IRS policy that decreases a person’s total taxable income. The deduction amount is based on your filing status. There is a another standard deduction for anyone over age 65 or the blind.