Oh, the joys of the IRS! It can be so challenging to understand what’s deductible and what isn’t. And even the most well intentioned people are intimidated and afraid they’re going to make a mistake. At the same time, you do want to keep the money that’s rightfully yours, right?
Here’s how to maximize your deductions, legally!
#1 – Understand the difference between a business expense and a capital expense
Business expenses are expenses incurred doing business. They’re usually tax deductible and include things like rent, travel and contractors and employees. Capital expenses are the cost of purchasing assets, for example a computer to run your business by or a car to deliver products or services. These don’t qualify as deductible business expenses, but you can deduct them by amortizing or depreciating them over time. The IRS offers guidelines for how to depreciate certain items.
#2 – Understand the difference between personal and business expense
Strictly speaking you cannot deduct personal expenses. However, some expenses are used both for business and personal. A cell phone, for example, or your home internet connection are often combined business and personal expenses and you can deduct the business expense. Determine the percentage of business expense and deduct that. The IRS does offer guidelines for some expenses.
#3 – You can deduct your home office
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation and are based on a percentage. This percentage is determined by calculating how much of your home expenses are used for business. The IRS offers articles and guidelines for home office deductions.
Know that you must use your home office regularly and exclusively. That means if your children use your office to do their homework, you’re unable to deduct it. You must also be able to show that your home office is your principal place of business.
#4 – Travel, Meals, Entertainment and Gifts
All business-related travel expenses can be deducted as well as all meals. If you take a client out for lunch, deduct it! If you send a client a bouquet of flowers or a gift basket, deduct it! If you take your family on a vacation and conduct business while you’re there, you can deduct a percentage of the trip.
#5 – Employees and Contractors
You can deduct the pay you give your employees and contractors.
#6 – Interest
This is a good one if you’ve funded your business with credit or a loan. You can deduct the interest charge to you. This is why it’s important to keep business and personal finances separate.
#7 – Retirement Plans
You can deduct the money you invest in your retirement account, depending on the amount you invest and how you invest it.
#8 – Insurance
You can deduct the cost of insurance for your business and this includes the cost of health insurance.
#9 – Business-Related Education
These expenses can be deducted. For example, seminars, classes, educational materials and conventions.
#10 – Subscriptions to industry publications and organizations
If you subscribe to industry publications, these can be deducted. And if you belong to any industry organizations, these too can be deducted.
It pays to stay on top of what you can and cannot deduct from your taxes. While maximizing deductions is the goal, you also want to make sure you’re operating within the IRS guidelines. If you have any questions, seek help from the IRS website or a certified tax accountant.