Make the Most of Your Business Tax Deductions

When running a business, you must spend money to make money. For instance, landscapers need tools and gas, web designers require computers and design software, and contractors must buy materials and pay labor. These expenses help calculate your business profit, which the IRS uses to determine your taxes. Simply put, your profit is the money you collect minus the money you spend on expenses. Lower profit means lower taxes.

However, not all expenses are fully deductible. For example, while you may need coffee to function, the cost of an espresso machine isn’t deductible unless you sell coffee. Taking a client to lunch allows for a 50% deduction, but this will expire after 2025 per the 2017 Tax Cut and Jobs Act.

You don’t have to show documentation when filing taxes, but you must have records ready if the IRS requests them, such as during an audit.

Basic Tax Deductions

Some deductions are straightforward. Expenses like rent for office or storage space, office equipment (computers, printers, desks), and supplies (paper, pens) are deductible. Most small business expenses can be tracked via a business checking account.

Home businesses, often sole proprietorships, typically file a personal IRS Form 1040 using Schedule C to report profit and loss. Deductible expense categories can include: advertising, vehicle expenses, office expenses, repairs and maintenance, office supplies, taxes and licenses and travel.

For businesses manufacturing goods or selling retail, the cost of goods sold can be calculated through an inventory method. Vehicle costs are deductible if the vehicle is solely for business use.

The critical question is: “Do you have evidence to support your deduction?” If you can’t answer “yes,” you should reconsider deducting those costs.

Specific Things to Track and How to Track Them

Per IRS Publication 535, “To be deductible, a business expense must be both ordinary and necessary.” For example, buying leather is necessary for a leatherworker but not for a tennis coach.

There are no specific legal requirements for record-keeping methods, as long as they clearly show income and expenses. Records can be in paper, book, or electronic form (like a spreadsheet). Organize documents in a way that suits you, whether it’s a desk drawer, file cabinet, or digital tool. Using a document management system (DMS) like one from The Neat Company can be beneficial. Such systems can capture data from various sources and convert it into text for easy manipulation and storage, often categorizing for bookkeeping purposes and sharing with a tax accountant. These systems also back up data securely in the cloud, making it accessible anywhere.

For example, contractors should log mileage when driving between job sites, but cannot include personal trips.

The Home Office

If using part of your home as a home office, choose between the simplified method or actual expenses. The simplified method deducts $5 per square foot up to 300 sq. ft. For actual expenses, deduct direct expenses in full. For instance, if your home is 1,200 sq. ft. and your workshop is 300 sq. ft., you can deduct one-fourth of expenses like utilities and insurance. Keep copies of all related bills in your business tax records.

Efficiency and Documentation

Financial precision requires thorough documentation of business activities. Receipts are essential for telling your business story. Aim to reduce clutter and enhance accessibility, whether storing receipts in a file, spreadsheet, or digitally through smart technology. This will streamline tax preparation, make audits more manageable, and simplify decision-making.  For more detailed information check out our article in Home Business Magazine.