Everything You Need to Know About Deducting Business Expenses on Your Taxes
It’s no secret that starting your own business can be lucrative, but there are some caveats you need to consider before jumping in with both feet. Deducting business expenses can help you reduce the amount of taxes you pay on your personal income, but only if you understand which expenses are allowed under the law and which ones aren’t. This article will help guide you through the basics of deducting business expenses on your taxes so that you don’t run into trouble with the IRS in the future.
What Are Business Expenses?
Before we get into a discussion about whether business expenses are tax-deductible, it’s important to distinguish between two common types of expenses: personal and business. According to IRS Publication 535 (Taxable and Nontaxable Income), there are two basic types of expenses that you can incur during your business operations: ordinary and necessary.
What Can I Deduct?
The IRS regulates business expenses in order to ensure that taxpayers are able to deduct only those expenses that are for their trade or business. However, there is no definition of what trade or business is. The IRS has said that every taxpayer must be able to answer two questions: (1) whether an activity qualifies as a trade or business; and (2) whether an activity qualifies as his/her own trade or business.
How Do I Calculate My Tax Deductions?
Tax deductions are simply expenses that have been used up in your business that can legally be subtracted from your total revenue and income during tax season. The most common types of tax deductions include office supplies, meals eaten while working, mileage driven for business, equipment purchases, and much more. Take a look at IRS Publication 535 for a comprehensive list of tax deductions you might qualify for as a small business owner or self-employed individual.
Can My Employer Help Me Out?
Some employers offer reimbursement for business expenses, but not all of them do. If your employer doesn’t reimburse you for business expenses, that doesn’t mean you can’t deduct those costs from your taxes. In fact, if you have a job and you spend money in order to do it money that isn’t reimbursed by your employer you can claim those expenses as deductions when filing your tax return.
Record keeping is a big part of being a business owner. From expenditures like supplies and clothing to travel and entertainment, it’s important that you know exactly what you’re spending and can justify your expenses if necessary. It may be wise to invest in a small notebook or binder in which you can keep receipts for every single thing that could be construed as a business expense.
Examples of Commonly Claimed Items
Make sure you have all your receipts and records so you can write down every one of your business expenses. Your organization, office supplies, travel, computers, and Internet connection are just a few things that could be eligible for a deduction. If you’re worried about getting everything organized in time for tax season, review these commonly claimed items that might help simplify things when it comes time to file.
Keeping Good Records
The key to deducting business expenses is maintaining good records. This means keeping receipts and documenting purchases, mileage, supplies, and everything else you spend money on related to your business. Most record-keeping software makes it easy for you to store these files online in a way that will help you if an IRS agent or other auditor comes knocking.