Whether you’re a freelancer, consultant or small business owner, every purchase you make that doubles as an investment for your business may be tax-deductible. The Internal Revenue Code allows you to write off all “ordinary and necessary” expenses required to operate your organization as deductions.
Examples of Business Tax Write-Offs
Business tax write-offs are numerous and can apply to most types of businesses. According to the IRS, expenses that qualify as tax write-offs should be customary to your industry and necessary for performing work, gaining clients and prospects or increasing income. Some of the most common tax write-offs taken by consultants, freelancers and business owners include:
You can deduct business expenses, such as utilities, advertising, marketing (including event sponsorships), office supplies, rent, travel and internet charges, so long as they are used to run your operations. Building-management costs, such as landscaping and repairs, can be looped under these general costs.
These include taxes, bank charges (wire transfers, overdraft fees) and business insurance premiums.
As long as your business is profitable, your health insurance is 100% deductible. This also covers payments for COBRA after leaving an employer.
This includes the purchase of office equipment, furniture and business vehicles, as well as the depreciation value of your equipment. Check with a tax advisor on what qualifies under this deduction.
Social Security Payments
You can deduct half of your payment amount if you’re self-employed. Read more about how to take this deduction here.
The U.S. Small Business Administration (SBA) estimates that approximately 75 percent of small businesses donate to charities annually. Besides the opportunity to become active in your surrounding community and to share a portion of your good fortune with those less fortunate, the IRS bestows tax-deduction benefits for individual and corporate donations.
Other deductions your business may qualify for include expenses related to business education, moving and losses from theft and fraud. See a full list of potential deductions here.
Besides claiming too few deductions, some small business owners get overzealous and claim too many. While you should take advantage of the deductions you’re legally entitled to, lying or stretching the truth on your business returns can result in an IRS audit, heavy fines and even jail time for tax evasion.
Meet with your accountant regularly to make sure that your tax write-offs don’t end up creating an even bigger tax liability. Some of the common tax write-off mistakes to avoid are:
- Mislabeling personal expenses as business expenses in deductions. You can only deduct services related to your business. For example, home-care services like gardening won’t count even though you work from home. If you’re unsure about something, double-check with an accountant.
- Claiming mixed-use personal space as a home-office deduction. Home-office deductions qualify if a portion of your house is used solely for business. You cannot use this space for other home tasks, or you may run into trouble. Hire a contractor to measure the square footage of the space and provide you with a letter proving your claim to the IRS.
- Deducting your personal cell phone or internet bill as a business expense. If you choose to do this, you’ll have to keep meticulous records and demonstrate that the majority of your calls were business-related. The same applies to home computers and other home-office electronics. As a best practice, keep your personal cell phone, laptop and other devices separate from those you use for business.
- Work uniforms or costumes. An easy way to determine whether this is a write-off is to ask whether the outfit could be worn outside of work. For instance, a new business suit would not qualify as a tax write-off. However, a clown suit for your party business would likely qualify for a deduction.
- Misidentifying contractors as employees and vice versa
- Writing off personal travel or family vacations as business trips
- Taking excessive deductions on income
Meet with your tax advisor ahead of time to gather the necessary paperwork you’ll need to identify and back up your deduction claims. Being organized and, above all, being honest about which expenses are directly related to your business will minimize the stress that comes with filing your business returns during tax time.