Business Deductions You May Not Know About
If you can document reasons for unusual business expenses used to benefit your business, you can generally deduct them from your business income. A bodybuilder, for example, got approval to deduct the body oil he used in competition. What can you deduct?
A valid write-off is any expense incurred in the production of income. Keeping good records and realizing when expenses have a legitimate business purpose are key. Go beyond collecting receipts: If you hire a teenager as an employee, document his or her duties and hours. On parking and toll receipts, write your destination and business reason for the road trip.
New business owners don't realize that the expenses that got their business off the ground can be deducted once the business starts. Expenses incurred beforehand might include a continuing education course, a lunch with a future client or a previously purchased computer that is now a home-office workhorse. You can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs, with the rest amortized. The hitch: There need to be adequate records. Keep a logbook in the car to ensure proper documentation of driving mileage.
The reimbursements you provide your own employees are deductible. This is true for expenses related to work, such as gas, meals, hotel accommodations, tips, transportation and even baggage fees. To claim such a deduction, a business needs to have an accountable plan that shows how reimbursed expenses were actually business-related. Among other deductions to consider:
- Looking for work. The cost of finding a new job can be high. If you're looking for a job in your field and you itemize deductions, document those that exceed 2 percent of your gross income; any over that threshold can be deducted. Remember that costs add up quickly. Consider the mileage you put on your car when driving to interviews and the cost of printing resumes.
- Self-employed Social Security. You have to pay 15.3 percent of your income for Social Security and Medicare taxes — the portions ordinarily paid by both employee and employer. But here's one small consolation: You get to take a deduction on your income taxes.
- Health insurance premiums. Medical expenses can blow any budget, but to be deducted, they have to a certain percentage of your adjusted gross income. However, if you're self-employed and responsible for your own health insurance coverage, you can deduct 100 percent of your premium cost. That gets taken off your adjusted gross income rather than becoming an itemized deduction.
- Tax savings for teachers. When K-12 educators reach into their own pockets to purchase items needed for classrooms, they are allowed to deduct $250 for materials. This gets subtracted from income and can be taken advantage of even without itemization.
- Education and training for employees.
- Exhibits for publicity.
- Investment advice and fees.
Upload receipts to an app like Hubdoc, which turns financial documents into digital files that are easy to store. Open a separate account for business deposits and expenses. Keep business expenses separate from personal expenses — the biggest audit flag is raised when they are comingled.
Of course, these are just the basics. There may be exceptions and special provisions, and the laws and regulations can change year from year. Your best bet is to think in the long term and work with a tax professional to come up with strategies for where you are today and where you may be five years from now. Project your financial life out so you can maximize your deductions and refunds, and minimize your taxes.