THE IDIOTS GUIDE TO SMALL BUSINESS WRITE-OFFS

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1 $ THE IDIOTS GUIDE TO SMALL BUSINESS WRITE-OFFS

2 THE IDIOTS GUIDE TO SMALL BUSINESS WRITE-OFFS When you sit down to do your taxes, thinking of all the write-offs that apply to your business can be overwhelming. These deductions are the most common for creative business owners. Since all businesses will have different types of expenses, you may have expenses that don t fit a certain category. The good news? You can create your own categories based on your needs. If you re a photographer and have a bunch of props, go ahead and create a Props Expense category. Let s walk through the common expense categories you ll use on a Schedule C tax form. ADVERTISING Advertising expense includes Facebook ads, traditional print ads, sponsorships, and any other expenses incurred to promote your business. CAR AND TRUCK EXPENSES This category is where you ll report either your business mileage or the business percentage of all your auto expenses. The mileage deduction is pretty simple. You ll multiply the total business miles driven by the year s mileage rate. The rate for 2016 is 54 cents per mile. The percentage of auto expenses method is a little more complex. You ll still need to track your business miles but with this option, you ll need to track all of the expenses related to your car. This means saving your receipts for gas, tune-ups, lease payments, insurance, etc. Divide the business miles by the total miles driven to get your business percentage. Once you ve got the business percentage, multiply it by the total auto expenses and you ve got your deduction. COMMISSIONS AND FEES This is where you ll put affiliate payments, commissions, and merchant processing fees. CONTRACT LABOR If you pay contractors, the total amount paid to them goes here. Payments to second shooters, virtual assistants, and subcontractors are a few examples of what can be included here.

3 DEPRECIATION When you buy business assets that will be used for a year or more in your business, you ll usually want to classify these purchases as assets. A few examples of assets are computers, cameras, lenses, and printers. They are a substantial expense and will usually last quite a few years. Depreciation is the special type of expense that s allowed for assets. INSURANCE Any professional liability insurance, equipment insurance, or other business-related insurance that isn t health related will be included in this expense. LEGAL AND PROFESSIONAL EXPENSES Attorney s and accountant s fees will go into this category. This includes fees for tax advice and the preparation of the business portion of your taxes. OFFICE EXPENSES Any necessary office supplies and postage expense will go into this category. RENT OR LEASE Any rental or lease of equipment or office space for your business will be included in this category. REPAIRS AND MAINTENANCE Any expenses related to repairing or maintaining your equipment or office space would go into this category. For example, if you re a photographer and you send your camera into the shop to get calibrated and cleaned, this maintenance cost should to in the Repairs and Maintenance category. SUPPLIES This category is used for supplies and equipment that you plan to use up within a year. It s also for incidental materials and supplies that you keep on hand, but don t keep an inventory of. An example would be tissue paper for wrapping products before they ship.

4 TAXES AND LICENSES Taxes and fees that can go in this category are real estate and personal property tax on business assets, regulatory licenses paid to state or local governments, and Social Security and Medicare taxes if you re an employer. Taxes that should not be recorded in this category are income tax payments and sales tax payments that were originally imposed on the buyer. For example, if you collect sales tax from a customer, that sales tax should not be reported in your gross sales or as a tax expense. TRAVEL In addition to business miles traveled or auto expenses, you re able to deduct travel expenses. These business travel expenses include things like taxi fare, airline tickets, hotel costs, and luggage fees. MEALS AND ENTERTAINMENT Within reason, food or drink expenses incurred while having a business meeting are deductible business expenses. You will record the expenses at their full cost in your bookkeeping, and on your tax return, they will be reported at 50% of the total cost. If you re just going to a coffee shop to get out of the house and get work done, those expenses aren t deductible. I wish! UTILITIES If you are paying for utilities (gas, water, internet, etc.) for a space your business rents or owns to operate out of, those expenses will be reported as utilities expense. It s not a place to list your home office utilities. That will go on a separate form. WAGES The wages expense is only for employees of the business who are on payroll. It s not where payments to the owner(s) should be recorded. OTHER EXPENSES In this category, you can make up your own sub-categories. The following are common expenses used in the Other Expenses section.

5 CELL PHONE EXPENSES Most small business owners have one cell phone they use for business and personal purposes. The cost of the phone and the monthly charges can be split up based on an estimate of how much you use the phone for business purposes and how much it s used for personal purposes. One way to estimate the business usage is to go through a couple months of statements and add up what minutes were personal and what minutes were for business calls. If you divide the business minutes by the total overall minutes used for the month, you will get the business percentage. EDUCATION AND CONFERENCE EXPENSES Any expenses incurred to educate yourself and improve your business can be deducted as a business expense. This includes e-books, physical books, online courses, in-person conferences, coaches, and any other educational expense. CLOTHING A common question I hear is whether or not clothing and shoes purchased specifically for work can be deducted as a business expense. It seems logical that you should be able to deduct an outfit you only wear for shooting weddings or speaking at events, but unfortunately that won t be good enough for the IRS when it comes to deducting the expense. Most clothing won t qualify as a business expense. If your clothing purchase satisfies these requirements (also found in the IRS Publication 17), then they can be deducted as a business expense. If not, consider them a personal purchase. Clothing must be specifically required by your employer. It is not enough that you do not wear your clothes away from work. The clothing must not be suitable for taking the place of your regular clothing. Some common jobs that would have clothing that satisfies these requirements include delivery workers, firefighters, and health care workers. DIGITAL DOWNLOADS If you purchase fonts, stock photos, and other digital images for business use, you can lump these together and call the expenses Digital Downloads.

6 SOFTWARE SUBSCRIPTIONS This category can include any software you pay a monthly or annual fee for. Some examples include your cloud accounting program, Google Apps for business, and Adobe Creative Suite. Try not to get too hung up on what category to choose for your expense. The IRS is most concerned with making sure you re reporting all of the income you received and you aren t over-reporting your expenses. They could care less whether you call that ream of paper an office expense or a supply.