Have you ever wondered what your small business can claim for expenses at tax time? Or maybe you are well-versed in tax deductible expenses, but are feeling unsure about what you can’t claim.
Tax deductible expenses fall under the general umbrella of “ordinary, necessary, and reasonable” expenses that contribute to a company’s income. These expenses can be subtracted from a business’s overall profit before being subjected to taxation.
The Internal Revenue Service (IRS) defines “ordinary, necessary, and reasonable expenses” as those which are common and accepted within a trade or industry, and is helpful and appropriate to your business. It is important to differentiate business expenses from capital expenses and personal expenses.
An expense does not need to be vital to be considered necessary. Some business expenses are specifically prohibited from being deductible, by law. These include clothing worn for work other than a uniform, bribes, traffic tickets, and unreasonably large expenses. Even if these expenses have contributed to the profit of a company, it is important to remember that they are not able to be claimed legally. You can see why it’s so important to have a concrete understanding of your deductibles!
Here is what you can and cannot claim for your business expenses:
Normally, personal and business expenses must be separate from each other, and living and family expenses are also usually independent from business expenses. But there are exceptions to this rule.
- Divide the total cost of expenses that are used partially for personal benefit and partially for business. Deduct the sum which was used for the business. An example would be if you received a loan and used 70% for your business, with the remaining 30% used for a holiday. That personal 30% is not deductible, as it was used for personal interest, but the 70% can be deducted as a business expense.
Home Office Expenses
Expenses concerning maintaining a home office can be a complicated issue. This is an area of tax deduction which is often abused and misunderstood. Only the portion of costs specific and exclusive to your business can be claimed.
- If you have a room such as a home office used solely for work, you can qualify to claim home office expenses. The costs to maintain that specific area can be deducted
- You cannot claim a landline as a business expense, as the IRS always considers this personal
- The space used for business must be entirely used for business (unlike a desk area which is also in a room used as a bedroom, for example)
- Figure the total expense amount associated with your home (mortgage interest, rent, real estate taxes, insurance, maintenance, etc) and deduct the percentage of your home that is dedicated to business
- The space used for business must be your principal place of business
- If you are confused, try using the IRS method of claiming $5 per square foot in your home which is used for your business
- The pro-rated cost of particular capital improvements can be claimed. These are improvements that improve the home permanently, like a new roof or addition
It is likely that you’ll need to drive a car for business, even if you work from home. Luckily, business-related mileage on an automobile is tax deductible. Just don’t include your regular commute to and from work.
- As long as your car travel is used specifically for business purposes, you can claim the mileage
- There are two methods that the IRS uses to calculate mileage deduction: straight mileage, which multiples the cents-per-mile allowed by the number of miles identifiable with business use of the auto, and the expense approach, which is the total sum of the car operations for a year (insurance, gas, etc), multiplied by the total percentage of the annual mileage used specifically for business purposes
- Keep all automobile records accurate and up-to-date to properly calculate business mileage
Who doesn’t love office supplies? These are other items which can be claimed as fully deductible business expenses. You are able to claim the cost of office supplies used during the year. Here is what can be claimed for business office supplies:
- Pencils and pens, staplers, paper clips, and other traditional office supplies
- Janitorial and cleaning supplies
- Organizational areas such as filing cabinets, storage lockers, and cabinets
- Invoices and sales receipts paperwork and other record-keeping supplies
- Furniture under $2500, like bookcases, shelves, and desks
- Postage for shipping your products
Advertising and Promotional Expenses
Yes, you can claim expenses used to promote / advertise your business! Getting word out is even more exciting when you know you can deduct the costs of doing so.
- Print and online advertising are included
- Workshops and seminars given by your business are another expense you can claim back
- Business cards, newspaper, magazines, and TV and radio advertising are deductible expenses
- If you are freelancing, the costs attributed to setting up, launching, and hosting your website can be claimed
- Membership dues for places or organizations that directly help your business are tax deductible
- Ideas can even be deducted! The time and energy it takes to formulate slogans and ad copy, or creating logos and graphics can be claimed
- Sponsorships for your business in your community are deductible, so get those t-shirts printed with your logo for your local team
Ordinary and necessary expenses for business travel can be deducted on your business taxes.
- Ensure your records clearly show amounts for each expense incurred while traveling, including meals, accommodation, and transportation fees
- Record exact dates of departure and return for every trip
- Record numbers of days spent on business, names of cities, and business reasons for travel
- Record expected business benefits from this travel
- Laundry and cleaning expenses while traveling are also deductible
Now that you have a good idea of what you can and can’t claim for your business expenses this year, let Time Tracker help you easily keep some of your deductible expenses in order. Simply take a photo of a receipt and upload it to Time Tracker. The snapshot will capture all of the relevant data such as date, price, and taxes, and record it as an expense and attach it to your invoice. Save hours in invoicing!
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