Tax deductions are a great benefit for the average taxpayer, but they can bring even greater tax benefits to a small business owner, contractor or freelancer.
Expensing business costs can help reduce taxes so you can put more money toward building your empire.
What Counts as a Deduction?
According to the IRS, “To be deductible, a business expense must be both ordinary and necessary.”
Ordinary simply means that the expense is common and accepted in your specific field. A necessary expense, on the other hand, is helpful or appropriate for your trade or business.
For example, a traveling salesman could deduct car expenses but a work-from-home freelance writer couldn’t (unless the car is being used to drive to a work-related meeting).
Don’t forget to keep track of receipts and related accounts of when and why an expense is deductible. Keep in mind; these expenses are usually deductible if the business operates to make a profit.
Personal Expenses versus Business Expenses
Generally, you cannot deduct personal, living or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal use. You can deduct the business portion.
For example, if you borrow money and use 60 percent of it for business and the other 40 percent for a family vacation, you can deduct 60 percent of the interest as a business expense. The remaining 40 percent is personal interest and is not deductible.
Here are 6 small business tax deductions you can take to potentially reduce your taxable income.
1. Home Office Deduction
Is there a specific space in your house that you use to work from home and you work from home regularly?
Then you can deduct certain home-related expenses, which could include mortgage interest, insurance, utilities, repairs and depreciation. The home office deduction is available for homeowners and renters.
2. Retirement Plans
Contributing to a retirement plan is a simple way to take advantage of a tax deduction. Full-time employees with a work-sponsored retirement plan who freelance on the side can still use a SEP IRA or SIMPLE IRA as well.
3. Travel Expenses
What if you want to go visit your parents and there just happens to be a conference in the area?
You can deduct the cost of traveling to the conference and staying in the hotel while you squeeze in some time to visit with your folks.
Just be careful about what you’re deducting. The IRS won’t view the cost to drive to your parent’s house or take them out for a steak dinner as business expenses.
Taking your kids with you can’t be expensed either.
4. Hire Your Children
That’s right. You can hire your kid (or kids) to help with the business. Your child can earn up to $6,300 without having to file taxes.
If your business is taxed as a sole proprietorship or partnership (in which each partner is a parent of the child) you won’t owe any Social Security or Medicare taxes on your child’s income if he or she is under the age of 18.
5. Holiday Parties
You can indeed expense the cost of throwing a holiday party for your employees.
But be careful, there are regulations (like all employees need to be invited). Keep a copy of the invitation and guest list. And don’t get too lavish.
6. Entertaining Clients or Customers
You don’t get Mad Men-era tax breaks anymore, but taking a client out to a fancy dinner, concert, sporting event or other entertainment for business purposes can be a write-off.
You can deduct 50% of the expense but be sure to keep proof of the guest list as well as how the event was related to business.