When you file taxes, you claim all the income and expenses your business incurred throughout the year. A write-off is a business expense that you are able to deduct from your taxes so you end up paying less.
So what happens when you overlook a write-off?
You pay more in taxes than you need to!
But there are some helpful rules of thumb to knowing what can and can't be written off as a business expense.
Every industry has different deductions. But there are two easy criteria that can help you figure out if an expense can be written off:
A business deduction is allowable if it is both...
1) ordinary to the field you’re in and
2) necessary to get the job done.
So if you own a salon, it is ordinary to have shampoo and supplies (scissors, products, etc) and it’s necessary to have those supplies to keep your business running. A salon can write these items off because they’re ordinary and necessary in their field. But a salon couldn’t write off a tractor because it’s not ordinary to have a tractor in the salon business!
Another example of an appropriate small business deduction is an accountant purchasing a printer – even if they bought the big cadillac version of the printer, it’s still ordinary for accountants to have printers and necessary for business: Therefore, it can be written off as a business expense. If you only incurred the cost in question because of your business, it’s deductible – even if you bought a more expensive version.
There are two important small business write-offs that small business owners overlook very commonly:
1. Auto miles
If you’re driving to meet a client, drop off a product, or are driving a car for another business purpose, make sure to track your mileage for each trip because you can take a deduction for every mile you drive.
2. Home office
If you work from home and have a home office set up, you’re able to take a deduction for that space. There’s a persistent rumor that you will get flagged to be audited by the IRS if you take a home office deduction, but that’s not necessarily true!
You’re able to take a $5 deduction for every square foot of dedicated space being used directly for your business – and you’re able to use just a portion of a room as well. If you have a 10’x12’ home office dedicated to working from home, that’s a $600 deduction! (120 square feet * $5/square foot = $600). Even if you’re only using 5’x5’ of that room for business, you can deduct for that portion of the space dedicated to your business – 25 square feet, or $125.
Tax deductions for small businesses can seem complicated.
Every field is unique, but these two easy criteria – determining if an expense is both ordinary and necessary – can help sort out which business expenses can be written off for your small business. Auto miles and home office space are two common examples of overlooked deductions many small business owners miss – keep detailed records of your milage and office use to write off these expenses!