Year End Tax Deductions
Here are the most common questions (and answers) that people have about small business and taxes:
1. I am newly self-employed. What can I deduct? According to the IRS, the self-employed can deduct expenses that are ordinary and necessary. “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.” (IRS.gov.)
2. What about auto expenses for example, are they deductible? Whatever business uses and mileage you have for your car are deductible because they would be “ordinary and necessary.” The key is to keep track of what part of your driving is for personal use and which part is for business.
3. I work out of my home. Can I deduct things like Internet and phone bills? To the extent you use the Internet for your business, the answer is yes, that is deductible – up to the amount or percentage that is business related. The same is true for your phone. Your business use is deductible, the personal use is not.
4. What about utilities? Now it gets a bit trickier. If you work from home, yes, part of your utility bills are deductible. The thing here however is that the amount is based upon the percentage of your home that is used for your business. For the sake of discussion, say you have a 1,000 square foot home and 15% (one bedroom) is used for the business. 15% of your utility bill would be deductible.
5. What type of marketing and advertising expenses are deductible? Any legitimate marketing you do is a deductible business expense, a holiday party for example. This includes everything else, from pay-per-click advertising and website creation and promotion to video production, business cards, and all advertising.
6. What are some other common self-employment business deductions? You can deduct office supplies, legal and accounting expenses, the cost of hiring employees, freelancers and contractors, computers and other equipment, professional licenses, association dues, periodical subscriptions, rent, cost of repairs and upgrades, and so on. The money you spend to run your business is generally deductible.
7. What about meals and entertainment? You can deduct 50% of all meals and entertainment related to business.
8. I heard that there are special rules for health insurance. Yes? This is the case where you may need to speak with a tax specialist, but yes, the general rule is that the self-employed can deduct the cost of their health insurance premiums, as well as that of their family.
9. What is the home office deduction? If you run your business out of your home, you can deduct associated business costs for things like mortgage interest, insurance, home repairs, and depreciation.
10. Will I get audited if I take the home office deduction? The deduction does not increase your odds of an audit, but you do need to calculate the deduction correctly. The IRS says you can claim the home office deduction if
- You use that part of the home regularly and exclusively for the business, and
- Your home office must be either the principal location of your business, or a location where you regularly meet with customers or clients.