It seems that tax codes change as unpredictably as the weather, and staying abreast of all the changes can feel like a full-time job. That’s why Humboldt Merchant Services has taken the time to research what qualifies as a business deduction and discovered a few examples of deductions that you may have forgotten. Please note that these are suggestions and might not work in every case. Be sure to check with your tax accountant or bookkeeper before claiming any of the deductions listed below.
First, let’s define a deductible. The IRS considers a deductible to be a business expense that is both ordinary and necessary. They further explain an ordinary expense is one that is common and accepted in your trade or business. An expense also does not have to be indispensable to be considered necessary.
It’s important to separate those expenses from the following:
- Expenses used to figure the costs of goods sold.
- Capital Expenses.
- Personal Expenses.
Here are the big differences:
The Cost of Goods Sold - The value of inventory at the beginning and end of each tax year is your cost of goods sold. That cost is then deducted from your gross receipts to figure your gross profit for the year. Some of the expenses that go into figuring the cost of goods sold include the cost of products/raw materials, storage, direct labor costs and factory overhead.
For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.
Capital Expenses - Capital expenses are considered part of your investment in your business and are comprised of these three types of costs:
- Business start-up costs.
- Business assets.
Business owners can opt to deduct or amortize certain start-up costs. Refer to chapters seven and eight of Publication 535, Business Expenses for more information.
Personal Expenses - Typically you cannot deduct personal expenses, but there is at least one exception — if you use expenses partially for business and partly for personal use, regulations state you can divide the two parts and claim the business percentage.
An example of this would be a loan where 60 percent of the loan went toward the business, and the other 40 percent was used for personal use, you can deduct 60 percent of the interest as a business expense. Refer to chapter four of Publication 535, Business Expenses on how to deduct interest and the allocation rules.
Now that we’ve defined what is eligible, here are a few overlooked real-world examples of what you’re allowed to deduct:
- Business entertaining — Your business meeting might not take place in a fancy steakhouse, but if you take a client or business associate out for a meal at your favorite local eatery be sure to get a receipt and make note of what business was covered at the meal.
- Insurance premiums — Are you self-employed and paying your own health insurance premiums? Those costs are 100 percent deductible with a few limitations. For example, the deductions can’t be more than the net profits of your business.
- Telephone charges — You can deduct the business calls you make at home on your taxes. As you get your bills, indicate which calls are business related, total those up and keep a copy for your records. When it gets closer to tax time, add the year’s bills, and that amount is 100 percent deductible.
- Education expenses — Educational expenses related to your current business, trade or occupation can be deducted, but education expenses that qualify you for a new job can’t be deducted.
As with any tax issue, please consult your tax advisor before you claim any deductions. Good luck and have a successful year!