As a millennial, chances are you have a side fuss that brings in some extra money. No matter how inconvenient it may be, this income must be declared in the tax return.
The good news is that you own a small business, which means you can take advantage of tax breaks to lower the amount of tax you owe!
However, new business owners and side fraudsters may not know what the costs are business costs and what they are in person costs. After all, there is a thin line between them.
As a business owner and CPA, I can tell you that you even manage both mine personal and business finances can become a bit … complicated.
1. Internet account
Businesses often have dedicated internet lines used only by the company. These lines are standard and normal business expenses, as you would expect.
Your internet at home can also be deductible if you use it at least partially for business. If you have a dedicated business internet line for your home that you do not use in person, this would be entirely deductible.
However, you are likely to divide home use of the Internet into business and personal use. In this case, divide your internet time between personal and business use. Then calculate the percentage used for business use and use this percentage on your internet account to get a deductible amount.
2. Mobile phone bill
Mobile phone bills work similarly to internet bills. Some companies have dedicated cell phones that are only used for businesses. In this case, they would be 100% deductible.
If you only have one cell phone line that you use for business and personal use, divide the use between personal and business use. Then use the business usage percentage on your account to get a deductible amount.
You can use a mobile phone account to back up this for minutes of conversations and text used, but sharing data usage is more complicated.
3. Health insurance premiums
Health insurance premiums may be deducted depending on your circumstances. If you offer your employees health insurance as a benefit to employees, this is certainly deductible as long as they qualify for the employee benefit plan.
Some small business owners may not be aware that the self-employed deduct health insurance premiums. You could be entitled to deduct health insurance premiums if neither you nor your spouse are entitled to an employer-subsidized health insurance plan.
The deduction has many limitations that you will need to consider. For example, the deduction should not exceed your earned income from your business. However, you should consider this deduction if you pay your own health insurance premiums, as health insurance is no cheap and this could lead to a significant deduction.
4. Cost of car or mileage
The easiest way to deduct the cost of a car is to deduct the total cost of operating the vehicle, but you can only do this if you are using the car 100% for business.
However, people who use the vehicle for personal and business use can still deduct the cost of the vehicle.
You can use one of two methods, depending on your preferences.
- A simple method is to keep a detailed mileage log your business use and use the standard mileage rate for those kilometers. The mileage log should detail each business trip you make. It should include the date you went, the purpose of the trip, the start and end mileage of your car for the trip, and the mileage you drove.
- The second method is a bit more complicated, but it may make sense if you have detailed records. You can claim the actual cost of operating the car when using it for business use. Of course, you need to keep bills for all of these costs.
Once you have the total cost of operating the car throughout the year, split the cost between personal and business use.
5. Business trips
A business trip can be deducted, but only as a normal and urgent expense. The IRS prohibits luxury and personal travel as a business expense.
Travel expenses are eligible if you have to be absent from your main place of business for longer than a normal working day. These expenses may include a plane ticket, Uber or Elevator travel, accommodation and other usual and necessary business expenses you incur during the trip.
You may be able to deduct the cost of travel to and from your destination, even if you add a few personal days to the trip. The key is that the trip should be primarily business related, and you can only deduct business, not personal expenses.
For example, you can go to a business conference on a Thursday to Friday and you can deduct the full cost of your travel expenses (i.e. flights, hotel stays, etc.) as you have to pay for these things to be able to attend the conference. If you choose to stay on Saturday and Sunday as well, those are the days no deduction as you stay just for fun and not for attending the conference.
6. Business installments
You may have heard that you can cost dinner as a business expense. That is in part right.
Not every meal your family eats can be counted as a business expense. Instead, you can only deduct actual business installments.
Until 31 January 2023 you can deduct 100% of your business installments, the normal 50% deduction is refunded after that date. A 100% deduction was introduced to help restaurants in trouble during the COVID-19 pandemic and encourage business travelers to continue supporting local restaurants.
So what exactly is considered a business installment?
The primary purpose of the meal should be related to your business. If you can prove the business purpose of the meal, it should meet the conditions. For example, when traveling for business, you need to eat. For this reason, business-related installments should be eligible.
But what costs to qualify? Some include:
- Food and beverage costs.
- Sales tax.
- Delivery costs.
you I can not deduct the cost of meals for spouses or children, unless those costs would otherwise be deducted as an operating expense (or are one of your employees).
Consult your tax preparation software or tax professional to determine which category your installment costs fall into, as many deductions can be complicated by the rules.
Training is a legitimate business expense if training helps your business in some way. As a CPA, I would easily pay for courses that help me gain knowledge about taxes. As a freelance writer, I could pay for a creative writing course.
Online courses can also be a cost. As a blogger, I could attend a search engine optimization course and rank it among business expenses. The key is to ensure that education helps your business in some way.
8. Home office costs
Home office costs are a legitimate business expense, but only if you follow the rules carefully. This cost is available to both homeowners and tenants. For a home office to be considered an expense, it must meet two tests:
- A home office should be a space that is used regularly and exclusively for your business. If you use this space for anything other than business, it does not qualify. This means that your office, which serves as a guest room, does not qualify. Fortunately, you can deduct part of the room. So if the office of your guest room is clearly separated, you can deduct the square footage used exclusively for business purposes.
- Your home should be the main place of business of your business. This means that it needs to be used extensively and regularly for business.
There are two ways to claim a home office deduction. Stress-free mode requires you to multiply the square footage of your office by a special dollar exchange rate per shoe set by the IRS.
Another way is to allocate the cost of the home according to the percentage of space your home office takes up from the entire home. This could result in a larger deduction, but requires a lot of calculations.
9. Office supplies
When you work from home, it’s easy to mix business and personal items. One of the categories of items that many people don’t think to deduct is the office supplies they use on a regular basis.
Office supplies must be used by the company to qualify. Nevertheless, there is a long list of subjects that can qualify:
- Printer paper.
Depending on your business, this can result in a significant deduction.
Subscriptions can be legal business expenses that you can deduct. As a freelance writer, I commissioned Grammarly to help me detect typos before submitting articles. This is a legitimate business expense if I use it solely for business purposes.
Other examples could include photographers who deduct subscriptions to photo editing software and a company that pays for their subscription to accounting software.
Software subscriptions are not the only eligible subscriptions. If your business is subscribed to a newspaper or magazine, it may be justified if it is used for business purposes.
Quick warning about deductions
Before you take the information and get started with it, I wanted to share a few caveats. Some experts recommend that you aggressively write off everything you spend money on and find a way to justify it as a business expense. I don’t belong in this camp.
You should only pay legal business expenses through your company. If they are legal, no problem. However, if you stretch the truth, you run the risk that the audit will fail and you will have to pay penalties and interest.
So what is a legal business expense?
The The IRS states:
“Operating costs are the costs of doing business or business. For a business expense to be deductible, it must be normal and necessary. A common cost is one that is common and accepted in your store or business. The cost required is the one that is useful and appropriate for your store or business. The cost is not necessarily indispensable to be considered necessary. “
You cannot be expected to understand all the details of the Tax Code as an individual. If you’re not sure if you’re sorting your personal and business expenses correctly, I highly recommend consulting an expert.
Read more: Should we hire a tax preparer?
As a business owner, you should generally take all the deductions you can. Each dollar deduction lowers your taxable income by one dollar and lowers the tax you pay. When you pay less taxes, you have more money that you can spend on your family, invest in funds, or reinvest in your business.
However, be careful when deciding what applies to a personal or business deduction. You want to make sure you follow IRS guidelines so you can back up your claims if they review you.
If you are under audit and the IRS refuses some of your deductions, you will have to pay the tax due and any interest and penalties. If you need help making these decisions, consult an expert.