At Watson & Associates, we have been working with business owners for 20 years. One of the core questions we get from new business owners is, “What can I deduct?” And to that question, you’ll get the most common CPA response, “It depends.” Every situation is different, and business taxes are trickier than individual returns. However, it’s important to know what business deductions the IRS allows a business owner to write off on the tax return.
For personal individual deductions, you can only deduct what is specifically listed in the Internal Revenue Code. For business deductions, while there is a lot of guidance on what you can and cannot write off, the fundamental principle is “ordinary and necessary.” Yet, for most business owners, expenses can be boiled down to one of two broad categories: direct and indirect.
Direct expenses are usually the business deductions that people most easily identify. This can include insurance costs, license fees, dues, business cards, office supplies, etc. If you can ask yourself the question, “Am I doing this for my business?” and the answer is yes, then generally you should be able to deduct it. Usually, the biggest trick with these expenses is making sure that you are capturing all of the relevant data, saving receipts, and hopefully entering it all in a bookkeeping system that will allow you to generate an accurate report at year end. A little work throughout the year to keep these things organized makes a big difference when you’re preparing taxes.
The other section of business deductions is the one most people struggle with, or simply just do not know. Business owners, meet indirect expenses! The most common types of these expenses are coming from expenses that have both a business and personal component: your cell phone, internet, car, and even your house if you have a home office. This is where things get a bit more complicated, so let’s take a deeper look.
When looking at cell phone and internet deductions, this usually involves separating the bill out to just the relevant expense. For example, you would not count a spouse or child’s line on the cell phone bill. You also would not count television if you have a bundled internet plan. Then, after separating personal uses, make a good faith estimate for the percentage of cell phone and internet usage for your business.
For cars, most taxpayers opt to use the standard mileage rate. In this case, the deduction involves creating a mileage log by using either an app such as MileIQ or a calendar that you keep in the car. Whether you use an app or old-school pen and paper, this log should track the nature of the trip and the amount of business miles driven. The IRS then allows a deduction (in 2021 $0.56/mile) based on the mileage. This standard mileage rate deduction replaces gas, insurance, repairs, and other expenses related to the car. So, for a small business owner, it can greatly simplify record keeping and tracking.
This can be a tricky one so we covered this topic in its own article, Home Office Deduction.
Again, every situation is different, and what may be deductible to one business might not apply to yours. The best way to know for sure, if you have any hesitance, is to consult a professional. Be wary of a person who says they set up their LLC to deduct everything they spend or that their business allows them to pay no taxes. The audit rate is low and, although nobody wants to be audited, it does happen. Just because someone has been doing something wrong and getting away with it, does not mean they will continue to do so. Do your research, and if you have any questions about business deductions for your specific situation, contact us. We are always happy to meet with you and discuss.
Watson & Associates, PA, Certified Public Accountants is a full-service professional CPA firm founded in 2002. We provide personalized, professional service to each of our clients.
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