As a millennial, chances are you have a side hustle that brings in extra cash. As frustrating as it may be, this income must be reported on your tax return.
The good news is that you are a small business owner, which means you can take tax deductions to reduce the amount of tax you owe!
However, new business owners and third-party entrepreneurs may not know what the costs are. business costs and which private expenses. After all, there is a fine line between the two.
As a business owner and CPAI can tell you even control both my personal and business finance can be a little … tricky.
More details: How to separate personal and business finances (and why you need it)
1. Internet bill
Companies often have dedicated Internet lines that are used only by the business. As you would expect, these are standard and common business expenses.
Your Internet at home may also be deductible if you use at least some of it for business. If you have a dedicated line for business internet at home that you don’t personally use, this will be completely deducted.
However, you will most likely separate your home Internet use into business and personal. In this case, Divide the time you use the Internet between personal and business use. Then calculate the percentage used for commercial use. and apply that percentage to your Internet bill to get the deductible amount.
2. Mobile phone bill.
Cell phone bills work the same way as Internet bills. Some businesses have dedicated cell phones that are only used for business. In this case, they will have a 100% deductible.
If you only have one cell phone line that you use for business and personal use, separate it into personal and business. Then apply the commercial usage percentage to your account to get the deductible amount.
You can use your cell phone bill to keep this going for minutes of calls and used texts, but sharing data usage is more difficult.
Health insurance premiums may be deducted depending on your circumstances. If you offer health insurance to your employees as an employee benefit, it is definitely deductible as long as it meets the employee benefit program.
Some small business owners may not be aware that health insurance premiums are deductible by self-employed individuals. You may be eligible for a health insurance premium deduction if neither you nor your spouse is eligible for an employer-subsidized health plan.…
Deduction has many limitations that you must follow. For example, the deduction cannot exceed your earned income from your business. However, you should look into this deduction if you are paying your own health insurance premiums, as health insurance No cheap and that can result in a significant deduction.
4. Car or mileage expenses
The easiest way to deduct vehicle costs is to deduct the entire cost of operating the vehicle as expenses, but you can only do this if you are using the vehicle 100% for business.
However, people who use the car for personal and business purposes can deduct the cost of the car.
You can use one of two methods depending on your wishes.
- The easiest way is to keep a detailed mileage log. your business and applying the standard mileage rate to those miles. The mileage log should contain detailed information about each of your business trips. It should include the date, the place where you went, the purpose of the trip, the starting and ending mileage of your vehicle for the trip, and the number of miles you traveled.
- The other method is a little more complicated, but might make sense if you have detailed records. You can claim the actual operating costs of your vehicle when you use it for business purposes. Of course, you should keep receipts for all these expenses.
When you have the total cost of operating your vehicle for a year, you divide the cost between personal and business use.
5. Working trips
Travel can be deducted, but only as normal and necessary expenses. The IRS prohibits luxury and personal travel as a business expense.
Travel expenses are counted if you have to be away from your main place of work for longer than normal working hours. These expenses may include airfare, Uber or Lyft travel, accommodation, and other normal and necessary business expenses that you incur while traveling.
You can deduct the cost of the trip to and from your destination, even if you add multiple personal days to your trip. The key point is that the trip should be primarily business-related, and you can only deduct business-related expenses, not personal expenses.
For example, you can go to a business conference on Thursday Friday and deduct the full cost of your travel expenses (e.g. flights, hotel accommodation, etc.), since you have to pay for these things in order to attend the conference. If you also choose to stay on Saturday and Sunday, these days will be No franchise, as you are staying just for fun and not to attend the conference.
6. Business lunches.
You may have heard that you can spend your meals away from home for business expenses. it partially truth.
You cannot pay for every meal your family eats as a business expense. Instead, you can only subtract actual business meals.
Until January 31, 2023, you can deduct 100% of the cost of your business lunch, after that date, the usual 50% deduction will be refunded. The 100% deduction was introduced to help restaurants struggling during the COVID-19 pandemic and to encourage business travelers to continue to support local eateries.
So what exactly is a business meal?
The main purpose of food should be related to the way you run your business. If you can prove the food’s business purpose, it must meet the requirements. For example, when you travel for business, you need to eat. For this reason, business travel meals should be eligible.
But what expenses qualify? Some include:
- The cost of food and drinks.
- Sales tax.
- Cost of delivery.
- Hints.
You I can not Subtract the cost of lunch for spouses or children, unless those expenses are tax deductible as a business expense (in other words, they are one of your employees).
Check with your tax preparation software or tax expert to determine which category your food expenses fall into, as the rules can be complex with many deductions.
7. Education
Education is a legitimate business expense if it helps your business in some way. As an accountant, I could easily spend the lessons that helped me gain knowledge about taxes. As a freelance writer, I could spend on creative writing lessons.
Even online courses can be paid for too. As a blogger, I could take a course on search engine optimization and attribute that to a business expense. The key is to make sure that education helps your business in some way.
More details: Have a freelance income? 7 tax tips to save money
8. Home office costs
Home office expenses are legitimate business expenses, but only if the rules are followed carefully. These costs are available to both homeowners and renters. For a home office to be considered expendable, it must meet two criteria:
- The home office should be a place that is regularly and exclusively used for your business. If you are using this space for anything other than business, it is inadequate. This means that your office, which can be used as a guest room, is not suitable. Fortunately, you can subtract part of the room. So, if your guest room is clearly divided, you can subtract the square footage used solely for business purposes.
- Your home should be your primary business location. This means that it must be used regularly and to the point to conduct business.
You can claim a home office deduction in two ways. The lighthearted way requires you to multiply the square footage of your office by a specific dollar per foot rate set by the IRS.
Another way is to distribute your household expenses by the percentage of floor space the home office takes up from the entire home. This can lead to a larger deduction, but is computationally intensive.
9. Stationery
When you work from home, it is easy to mix business and personal items. One category of things that many people don’t think of deducting is the office supplies they use regularly.
Stationery must be used by the company to qualify. However, there is a long list of items that may fit the requirements:
- Ribbon.
- Paper for printer.
- Folders.
- Binders.
- Bubble wrap.
Depending on your business, this can result in a significant deduction.
10. Subscriptions
Subscriptions can be legitimate business expenses that you can deduct. As a freelance writer, I subscribe to Grammarly to help me spot typos before submitting articles. These are legitimate business expenses if I use them solely for business purposes.
Other examples might include photographers deducting a photo editing software subscription and a business paying for their accounting software subscription.
Software subscriptions are not the only eligible subscriptions. If your company subscribes to a newspaper or magazine, it may be eligible if used for business purposes.
Quick warning of deductions
Before you take the information and start working with it, I would like to share a little warning. Some experts recommend that you aggressively write off whatever you spend your money on and find a way to justify it as a business expense. I do not fall into this camp.
You should only write off legitimate business expenses through your business. If they are legal, there is no problem. However, if you disclose the truth, you risk failing the audit and you will have to pay fines and interest.
So what exactly are legitimate business expenses?
V The IRS states:
“Business expenses are the costs of running a trade or business. Deductible business expenses must be both routine and necessary. Regular expenses are expenses that are common and accepted in your trade or business. Necessary expenses are those that are useful and appropriate for your trade or business. The expense does not have to be irreplaceable to be considered necessary. “
You cannot expect to understand the intricacies of the tax code as an individual. If you are unsure whether you are categorizing personal and business expenses correctly, I highly recommend consulting with a professional.
More details: Should you hire a tax professional?
Summary
As a business owner, you generally have to make all possible deductions. Each dollar deducted reduces your taxable income by a dollar, thereby lowering the tax you pay. When you pay less taxes, you have more money to spend on your family, invest in assets, or reinvest in your business.
However, be careful when deciding what counts as a personal or business deduction. You want to make sure you follow the IRS guidelines so you can substantiate your claims in case of verification.
If you are being audited and the IRS prohibits some of your withholdings, you will also have to pay the tax due, and possibly interest and penalties. If you need help making these decisions, please consult a professional.