When it comes to reducing business income for tax purposes, the tax deduction is one of the most popular methods.
You can deduct some of the money you spend on business and lower your taxable income.
However, it’s important that you understand what makes an expense tax deductible for business purposes. Otherwise, you could find yourself red-flagged by the IRS.
But What Business Expenses are Tax Deductible?
Ordinary and Necessary Expenses
Your first test is whether or not the expenses you want to deduct are ordinary and necessary.
The IRS doesn’t let you deduct expenses that aren’t ordinary for your industry, and that are considered necessary for your trade or business.
Here are some definitions that can help you figure out if your business expense qualifies:
- Ordinary: An ordinary expense is one that is common in your industry or trade. If many business owners in your industry pay the expense, it is considered “ordinary.” An ordinary expense is accepted in your field, and you are allowed to deduct it.
- Necessary: Luckily, the IRS doesn’t say that your expense has to be completely indispensable in order to be considered necessary. Rather, a “necessary” expense is one that is “helpful and appropriate for your trade or business.”
Attending a blogging conference may not be an indispensable part of your business, but it can be helpful in terms of making connections and forging partnerships.
Additionally, it has become ordinary to attend conferences in order to help you build your business. As a result, one of the blogger tax deductions that has become accepted is the deduction related traveling to conferences.
It’s also worth noting that you need to separate your business expenses from other expenses in your life.
The cost of goods sold, capital expenses, and your personal expenses are not the same as business expenses, and they shouldn’t be included in your calculations. You will have the ability to deduct your cost of goods sold, and your capital expenses, in other areas of your tax return.
What Can You Deduct?
The first thing you need to remember is that you can’t deduct the same expenses twice. So, if you deduct something from your gross profit under “cost of goods sold,” you can’t deduct it later as a business expenses, even if it’s something you think of as a business expense.
You should also realize that your deductions have to be used only for business purposes.
You can’t deduct the entire cost of office supplies if you also use them for personal purposes. The IRS does, however, allow you take partial deductions.
If you have a home business, and you use the Internet, you can calculate the percentage of Internet use that goes toward business activities, and deduct that amount. If you pay $900 a year for Internet, and you figure that 75% of your usage is related to your business activities, you can deduct $675 of your Internet usage as a business expense.
Other expenses that you can take a partial deduction for include business use of your home, interest paid on a loan used to help with your business, and mileage for your car.
Make sure that you take care to accurately determine which portion is for business, and which is personal.
Here are some additional common business expenses that are tax deductions:
- Office supplies
- Equipment used for business (including printers, phone headsets, computers, etc.)
- Travel expenses related to business travel
- Online expenses (domain registration, web hosting, web development, etc.)
- Advertising costs
- Business incorporation costs and business licenses
- Wages and contract pay to employees and freelancers
- Mailing materials and costs
- Consulting services you pay for
- Trade publications
- Cost of preparing your business tax return
If you have a question about what expenses are eligible for a tax deduction, consult with a tax professional who can help you determine if the cost is tax deductible.
Keep Good Records
Be sure to keep good records of your expenses.
You want to save all relevant receipts to support your deductions. If you are using your car for business purposes, keep track of your mileage so that you can deduct that.
Organize your tax records so that it is easy to locate the receipts and other documentation. If the IRS asks for more information, you should be able to provide it.
One general rule of tax deductions is to not take it unless you have the records to back it up.
One of the best things to do is to keep a folder of receipts. This can be a digital folder, kept on your computer, with scanned documents, or it can be a hardcopy folder where you place the receipt as soon as you make the purchase.
You may not have to send all the receipts to the IRS, but you should keep them with your copy of the tax return so that they are accessible.