A Simple Guide to Small Business Write Offs
Business write offs are deductions from a business’s earnings. For income tax purposes, write offs are business expenses that get subtracted from revenue to find your total taxable revenue. For example, a freelance interior designer can claim car mileage as a tax deduction since they travel to meet with clients.
There can be some confusion when it comes to what you can or can’t claim as a business write off. But the good news is that it’s fairly simple to understand when you have the right information. Here’s a simple guide to small business write offs.
In this article, we’ll cover:
- What Are Business Write Offs?
- How Do Business Write Offs Work?
- What Expenses Can You Write Off for Your Small Business?
- Key Takeaways
What Are Business Write Offs?
Business write offs are expenses that are essential to running your business and you can claim them as tax deductions. These expenses get subtracted from your revenue to determine the total taxable income for your business. The more expenses that your small business can claim as write offs, the less tax you are going to have to pay.
That said, to qualify for write offs, a business must be run with the purpose to make a profit, and it can’t be a hobby. Most for-profit business expenses are at least partially deductible.
The IRS states that for an expense to be deductible, a business expense needs to be both ordinary and necessary. Simply put, the expense has to be a common expense within your industry and helpful for you to do your work. Still, the expenses don’t have to be absolutely indispensable to get considered necessary.
For example, an ordinary expense could be a life coach writing off their business cell phone bill. Taking calls from clients is a common practice in life coaching, so a cell phone would be considered an ordinary expense.
A necessary expense, for example, could be a handyman printing flyers to advertise their services. They can expense the cost of printing the flyers since it’s a marketing tactic to help his business succeed.
However, what if a handyman produces an extremely expensive TV commercial that advertises his business? If they try to expense those costs they will most likely get shut down by the IRS. After all, such an over-the-top marketing campaign isn’t necessary for business purposes.
Personal Vs Business Expenses
Personal, living or family expenses can’t get written off as part of your business’s taxes. On the other hand, a small business owner can expense a purchase that has both personal and business uses. You just need to make sure you divide the cost appropriately between personal and business use. Then, you can write off the business proportion.
For example, if you wanted to expense your home internet. You need to figure out how much you use for business. Let’s say you work 40 hours a week, which is 160 out of 672 hours in a month, or 24 percent. If your internet bill is $62 per month, you could then expense 24 percent of that amount, or roughly $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 to this is partnerships, who 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 on its website.
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. To properly categorize expenses, it’s a good idea to make expense categories in your accounting software.
You can base them on common expenses or deductions that get offered by the IRS. Here are some of the most common expense categories.
- Car and truck expenses
- Education and training
- Employee benefits, such as health insurance
- Meals and entertainment
- Miscellaneous, such as bank fees or wages
- Office supplies and postage
- Rent and lease costs
It’s important to make sure you keep documentation of all your business expenses, small or large. Businesses can’t rely on entries in their bookkeeping software to prove actual costs. Even bank statements might not be sufficient.
You must keep all your receipts and records of the purchase, whether it’s physically or digitally. This will help you stay prepared should your business get audited by the IRS. If that happens, they might ask you to prove the deductions claimed on your tax return.
As well, you need to keep those detailed records for three years after you file your return. This can get extended to seven years if the IRS thinks you might not be reporting all your income.
What Expenses Can You Write Off for Your Small Business?
Understanding what expenses you can and can’t claim or write off for your small business is important. It can help you decrease the amount of income tax that you owe or even increase your refund. Here are some of the most important small business write offs.
Advertising and Promotion
You can deduct the cost of advertising and promotions, which can include things like:
- Hiring a freelancer to design your business logo
- How much it costs to print business cards or brochures
- Needing to purchase ad space in online media
- Sending greeting or thank you cards to clients
- Starting and launching a brand new website
- Implementing a social media marketing campaign
- Being a sponsor of an event
Keep in mind that you cannot deduct costs that get paid to influence legislation or if you sponsor a political campaign.
Most of the time, you can deduct 50% of food and beverage costs as long as they qualify. There are certain criteria to meet to be eligible.
- The expense needs to be an ordinary and necessary aspect of doing your business
- The meal can’t be a lavish or extravagant party
- An employee, or the business owner, needs to be present at the meal
As well, you can deduct 50% of costs when you provide meals to your employees. So, if you had a pizza dinner with your team or a meal provided at the office then it’s deductible.
Make sure that you’re keeping the necessary documentation that includes how much each expense is. As well as the place and the date the meal happened and the business relationship you have with the person you're with. The easiest way to do this is to write down the details on the back of your receipt.
Certain premiums that you pay for business insurance can get deducted. These might include:
- Property coverage for equipment, building or furniture
- Liability coverage
- Group dental, vision and health insurance for your employees
- Professional liability and malpractice insurance
- Workers compensation coverage
- Auto insurance if you have business vehicles in use
- Life insurance that covers your employees as long as you’re not a beneficiary of the policy
- Business interruption insurance if your business has to shut down due to fire or other circumstances
If you get charged annual or monthly service charges, transfer fees or overdraft fees for your bank or credit card, they might be deductible. You might be able to deduct transaction fees or merchant fees that you pay to third-party payment processors. Which could include platforms like Stripe or PayPal.
Keep in mind that you cannot deduct any fees that are directly related to your personal credit cards or bank accounts.
Business Use of Your Car
If you need to use your personal vehicle for business purposes then you can deduct certain costs of operating your vehicle. Make sure that if you use it for both business and personal reasons to only deduct the actual business-related usage.
There are two different methods for figuring out your vehicle expenses. You can go with whichever one provides you with the best tax benefit.
- Standard mileage rate. This rate is currently $0.56 per mile, and you multiply it by the number of miles driven for business.
- Actual expense method. This method revolves around tacking all the costs of operating your vehicle. These costs can include gas, repairs, oil and tires. They could also be registration fees, lease payments and insurance costs. You would then multiply those expenses by the percentage of miles you drive for business.
Both methods require you to keep accurate records and logs of your business mule. You can use an app to help track and monitor your trips or update your mileage to be more efficient. Make sure to clearly document things like the total miles driven, the time and place and the purpose of your trip.
You can’t deduct the miles driven when you commute to work. Those are considered to be personal commuting expenses.
You might need to hire a freelancer or independent contractor to do work for your business. If you do, you can deduct the cost of their fees as a business expense. That said, if you pay a contractor over $600 throughout the tax year you need to send them the Form 1099-NEC no later than January 31 of the next year.
Sometimes your business needs to purchase things like equipment, furniture or other assets. When that happens, depreciation rules make it so that you have to spread out the costs of those assets. This has to happen during the years they’re getting used instead of just deducting the whole cost at once.
When you expense depreciation costs upfront it can make for a quicker tax benefit.
Some education costs can get fully deducted as long as they add value and increase your ability to do your work. The IRS will take a look at whether or not the expense maintains or improves your skills. Here are some of the common business education expenses.
- Certain classes or programs that improve your skills in your field
- Seminars and webinars
- Certain subscriptions to trade or professional publications
- Workshops that improve your skills and expertise
- Any transportation expenses to and from classes or workshops
Home Office Expenses
You might be able to deduct certain home office expenses if you work from home. There are two ways that you can do this.
With the simplified method, where you deduct $5 per square foot of the area of your home that you use for business. And the standard method, where you track all your actual expenses.
To qualify for home office deductions you need to meet two criteria:
- You need to regularly use your home for business purposes
- Your home office space needs to be the principal place that you conduct business
Using the standard method for home office deductions means you will have to file Form 8829 when you submit your Schedule C.
There are lots to take into account and consider as a small business owner. Especially when it comes to taxes and which expenses you can deduct. Take a look at the IRS website for a full breakdown of expenses that you can write off as a small business.
They can range from home office supplies, education and training, travel and contract labour. Knowing which expenses you can and can’t claim can help reduce your taxes and increase your income tax. Who doesn’t love saving money?
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