Those who are self-employed need to understand proper tax deductible business expenses to ensure they have filed their taxes correctly. Learn more here.
Few people enjoy knowing that the end of the year brings about the requirement to prepare their annual tax returns. For those who are self-employed, there is an additional burden of making sure that they are claiming only valid business expenses. The Internal Revenue Service states “To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Ordinary business expenses
Specific businesses require certain items in order to provide the services that their clientele request or expect from them. For example, a writer may require dictionaries, grammar checking software and plagiarism software. It is highly unlikely that a manufacturing company would require these items.
Ordinary business expenses are classified as expenses that are incurred in obtaining and maintaining the needed equipment, software and tools that one could reasonably expect to need for their day to day work. Continuing with the theory that one is a writer, the following could be considered “ordinary and necessary” expenses:
- Internet access – writers who engage in online writing need internet access in order to work. However, this does not mean that other writers do not need access. Writers for newspapers and magazines may need internet access for research purposes;
- Subscriptions – subscriptions to trade magazines, industry news magazines and continuing education magazines may also fall under ordinary business expenses. If one can prove that these subscriptions enhance their ability to perform their work, they may be considered a valid business expense;
- Entertainment – those who entertain clients also are allowed certain deductions. This may include providing clients with tickets for shows, taking them out for a meal or simply meeting a client for coffee. Follow the rules for deductions for entertainment expenses and you may be surprised at how much is allowable;
- Mileage expenses – there are very specific rules in regards to mileage expenses being deducted. In order to claim a deduction for mileage, filers must make sure that they are using mileage that is associated with business and not personal use;
- Office space expense – there are deductions that are allowed for rental space. However, this does not mean that people who work from home are left out in the cold. There are very specific requirements for claiming a home office deduction. Having work space that is separated from living space is necessary in order to make the most of this deduction. In general, expenses incurred in modifying living space to be office space are not allowable deductions.
- Insurance expenses – whether you have a liability policy or policies that otherwise protect your business, you may be able to claim the premiums that you are paying as a tax deduction. Reviewing the full rules on insurance expenses can result in a hidden tax deduction you may not have been aware of;
- Interest expenses – for those who have borrowed money to help their business, the interest on the loans may also be tax deductible. If you borrowed money and used only a portion of it to fund your business, you may only deduct the interest that is associated with the business portion of your loan.
Business tax filings
Small business tax filings can be very complicated. They are not impossible to do on your own if you elect to do so. Using Internal Revenue Service Publication 535 can help you make sure that you do not miss any deductions that you might be otherwise entitled to. In many cases, the forms that you fill out during your quarterly filings are useful in preparing your year end filings.
Understanding Tax Deductible Business Expenses
Understanding what business expenses you may be allowed to deduct on your taxes can help you properly categorize your business expenses throughout the year. Keeping accurate records of income and expenses is vital in preparing accurate tax returns. Those who work for themselves should make sure that they carefully track their earnings so that none of them go undeclared at tax time.