Tax season can often be seen as a confusing and irritating time, especially if you run your own business. We’re constantly forking over money to keep our businesses afloat, and then tax season comes along, which can be a nerve wracking event in itself. As a certified tax professional, I constantly receive the question “What exactly can I write off on my taxes?” Unfortunately, there is no master list of items you can write off, since each deduction has its own set of rules. In this article, I have provided detailed information on what exactly qualifies as a business deduction and how to properly write these expenses off.
The key is that you use the term “home office” the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else. The deduction, however, isn’t limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.
You can deduct the cost of the business calls that you make for business from home. When your bill comes in, circle the business-related calls, total them up and keep a copy. At the end of the year, tally your 12 bills and deduct 100 percent. The IRS assumes that you will have a phone anyway, so regular fees and charges don’t count toward your deduction. However, if you have a second line installed and use it only for business, all of these charges are deductible.
You may either deduct 100 percent of the cost in the year of the purchase or depreciate the expense over a set number of years, depending on the items purchased.
To take the whole cost in one tax year you’ll use the Section 179 deduction. However, the Section 179 limit for 2016 has been greatly expanded to $500,000. If you choose instead to depreciate, you can’t simply split the cost into equal portions over the depreciation period. Instead, you must use an IRS chart to make separate calculations each year.
If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. There are two methods to claiming expenses:
As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction. If you use the actual expense method, you can also deduct depreciation on the vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years.
If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
Whether you’re just starting out or a seasoned business owner, it is crucial that you keep great records and find a system to stay organized throughout the year. I suggest working with your CPA at the end of the year to ensure the items you are writing off are legitimate business expenses. Excellent record keeping will also minimize your risk of being audited and make tax season less stressful.