Ahhh the joys of being a business owner. You get to set your own schedule, be in complete control of your success and of course, deduct your business expenses.
Just like all of those statements, there are some pros, cons and a lot of misconceptions that go into being a business owner. And when it comes to write-offs, you can face serious financial consequences for getting it wrong.
Sometimes it’s humorous what business owners will try to write off, sometimes it’s innocent and other times it’s absurd. Below are some insights and common questions we get on what exactly is considered a write-off.
A tax write-off is a legitimate expense that can be claimed as a deduction or a credit and lower your taxable income.1 This means that you can only write off expenses that are used exclusively for your business. Partly used, sometimes used or only used once for the business often doesn’t cut it and cannot be written off.
What is not a write-off?
A very important aspect of business and business ownership but don’t let this fool you into thinking that you can claim expenses such as dry cleaning, manicures or even a new wardrobe. None of these expenses can be claimed as a write-off; even if they are for a photo shoot or special event. Real estate agents are notorious for assuming they can claim such expenses, so don’t get disappointed if your accountant says, “No.”
Home offices, although convenient and necessary, do not always count as a write-off. For these expenses to qualify, you must be using the space and equipment exclusively for business purposes. Setting up on the dining room table? Not a write-off. Sending a few business emails from the desktop computer on which the kids play video games? Not a write-off. Commandeering the guest bedroom for a quiet space to work for a few hours a week? Not a write-off… Turning your basement into a dedicated office… possibly a write-off based on square footage. It’s always important to consult a tax professional when making these decisions, but in most cases, if you have to ask, you probably already know the answer.
Meals are occasionally a write-off, but again it has to be for the business and not just your personal benefit. That mid-afternoon Starbucks pick-me-up? Although it may have made you more productive, it’s not a write-off. Lunch at your desk? Necessary, but also not a write-off. Just because you eat during business hours doesn’t give you the ability to deduct those expenses. Unfortunately, when it comes to meals, there are few instances where you can actually write-off the expense. It requires other diners, a business reason and a far distance from your home.
Setting up your office can be considered an expense, but it’s a slippery slope and takes some common sense. For example, a client wanted to write off thousands of dollars of fish tanks. Yes, they were used as office decor, but you can’t write off your pets! This goes for dog food or toys, even if Fido is the company mascot.
What can I write off?
When paying for health insurance, did you know that the business can foot the bill? However, you’ll have to file your taxes as an S Corp and have to run a payroll. For individual business owners, this may be a great way to mitigate your tax liability, but for larger companies, health insurance can be a major line item on the Profit & Loss statement. Taking care of yourself and your team (and offering benefits to high-quality talent) has many lasting benefits and serious bottom-line impacts.
The exception to this rule? Tattoos! Although they involve needles, the IRS will not consider them a medical expense and you cannot deduct dollars spent on decorating your body.
If you are a business owner you can choose to write off a percentage of your total car expense or miles, but not both. Choose wisely as this decision will be locked in for the lifespan of your vehicle. Given that the car can be used for personal and professional situations, it’s important to calculate an appropriate percentage based on actual usage.
Internet and Phone services:
Although you may be streaming Netflix on your internet, or texting friends, phone and internet services can be considered a write-off. To be clear, only the internet (Comcast, RCN, etc.) service can be a write-off, NOT your Netflix and Hulu subscriptions.
The best way to keep track of write-offs and regular expenses is to separate your personal accounts from your business accounts. We get it, we all make mistakes or accidentally use the wrong card, but be sure to keep your receipts and your financial team can make an adjustment. Those personal expenses spent on your company card will need to be categorized as a loan to you from your company or distribution to keep the books balanced.
If you’re looking for a partner to provide guidance and set up the systems and processes for impeccable financial management, give My Small Business Pro a call. We will work with your accountant to help you understand what is and is not a deduction and maintain a clear financial picture.