7 Business Tax Write-Offs You Don't Want to Forget About
It's tax time, which means you're probably either finalizing your books for last year or you're in panic mode because you haven't even looked at your business finances. I'm not sure about you, but I don't like to pay Uncle Sam any more than I'm legally required to, and the way I make sure of that is to ensure I'm claiming all my legal deductions.
So, let’s go over seven write-offs that you want to make sure that you don't miss. After reviewing returns prepared by other people or DIY’ers, these are the top seven that are usually missed.
Credit Card Processing Fees
These fees are paid to vendors such as Square, Stripe, PayPal, and other payment processors. They're usually a percentage of your sale, plus a dollar amount sometimes. So how does all this work, anyway? Let's just assume that you have a $100 sale. So you sold an item for $100 and your client pays you through Stripe, and the Stripe fee comes out to be $5. So 100 minus 5 equals 95. That $95 goes into your bank account. Now there's no indication on your bank account that it was originally a $100 sale, but this Stripe took $5 and you were left with $95.
Here is where the mistakes happen. A lot of small business owners only pick up the $95 in income when really they should be picking up the $100 of income and then reducing that income by the $5 fee and claiming that as a deduction. Now the 1099s that are going to be issued from Square, Stripe, or other payment processing platforms are going to be for the original amount of the sale. So it's super important that your books, your accounting, and your bookkeeping reflect what the actual sale is because that is what the 1099 will be issued for.
So make sure your books are accurate. Keep account of the gross sale (the original sale price) and also keep account of those fees.
Cell Phone Expenses
What I'm talking about here is your private cell phone, your personal cell phone, that is used for business purposes too. I'm finding that a lot of people don't even bother with this because they don't know how to claim it. So, they would just rather play it safe and claim zero as a deduction for their cell phone so that they're not making a mistake.
Well, I'm here to tell you that you can write off a percentage of your personal cell phone if you use it in your business. The first thing you're going to do is to take a week, maybe start this coming Monday, and write down how much time you spend each day on personal calls, and how much time you spend on business calls.
You’re also probably using your smartphone for other things as well. Maybe you're booking appointments, you're talking to clients on Facebook or other social media, you're checking your email, the list is endless of the things that we do these days on our smartphones. So take that time into consideration as well, not just having phone calls.
Also, I’ll note that most smartphones these days have a reporting system that will tell you how much time you're spending on different apps on your phone each week. This will help you as well because there are certain apps you may only use for business, and with those, you can easily figure out the time that you’ve spent that week for business purposes.
Here's an example of how this can help you with your business taxes: If your cell phone bill comes out to be $150 a month, and over the course of the week, you determine that you use your cell phone 70% of the time for business. We would take that $150 a month, multiply it by 70%, and your total write-off would be $105 per month. For the year, this would add up to a $1,260 deduction.
That's great, but deductions don't mean tax savings. If you have a tax rate of 25%, which is pretty average, this one deduction that you took just a little bit of time to figure is going to save you $315 in taxes. This upfront work will definitely save you on your return.
Your Home Internet Expense
This is pretty similar to your cell phone, with a couple of exceptions. Remember, you don't have to claim the business use of home or the home office deduction in order to claim your home internet expenses. This is a common misconception.
I want you to think of some ways that you utilize your internet in your home. You probably use it a little more for personal expenses than you even realize. Think about your TV. Do you stream Hulu, Netflix, and other things? What about gaming - are you or your kids a gamer? What about utilizing your Wi Fi for your cell phone use? And, do your kids do any virtual learning?
So take some time next week and really think about the amount of time that you use the internet. or the portion of the internet that you use for personal versus the portion of the internet you use for business. Also, I want you to consider if your internet is bundled with other things, such as your TV or your phone, and if so, you're going to need to get your bill out and determine what portion of the bill is strictly for the internet.
Now let's see how this breaks down. In the example that I'm going to give you, it is a bundled package between your internet and your TV, and it's $220 a month. You look at your bill and you determine that your TV is $100, therefore your internet is $120 per month. After doing your research for a week do you determine that the percentage of business use for your internet is 60%. 60% of $120 is $72 per month, which totals $864 per year as a deduction for internet use. At a 25% tax rate. This one deduction just saved you $216.
To me, it’s well worth checking into and keeping up with the time just for a week so that you have an average.
Mileage
Mileage, for this scenario, is miles to any place that you drive for business that is not your principal place of business - so let's go over the principal place of business. If you primarily work from home, then your principal place of business is your home. If you go into an office to work mostly, then that is your principal place of business. Let's take a hairstylist for example. They would have a salon outside their home, typically, and that would be their primary place of business.
Mileage is going to consist of anything that you use for business and I want you to think about meetings, whether they're for your clients, your colleagues, maybe picking up supplies, going to the post office or making mail run, going to the bank - anything that you do for your business would be considered a business mileage expense.
Miles are not going to count if you are commuting. Commuting means from your home to your place of business. However, if you travel after you get to your place of business for an errand, then you are able to count this deduction.
For example, I work from home, just as many of you work from home. If I were to travel from my home and I'm going to pick up office supplies, then I'm able to count that mileage as a business expense. However, if I'm going from my home to an office, that would be considered commuting.
So - home to a principal place of business is never a deduction. But once you get to your place of business and you go to do business errands, then you can deduct those particular miles.
The trick here is if you are going from home into an office, or if you're a hairdresser and you're going into the salon, for example, the way that you can use business miles for this is to make a stop along the way.
Let’s say I'm traveling to the bank on the way to my principal place of business. The bank to my principal place of business is no longer deductible, but from my home to the bank will be deductible. So plan your route accordingly so that you can deduct most of your business miles.
Here’s an example of how your business miles deduction impacts your tax savings: If you add up your business miles, and let’s just say you had 1,000 miles for business, which is not a whole lot. The standard mileage rate for the tax year 2021 is 56 cents per mile. That would give you a tax deduction of $560, and at the 25% tax rate, that is a savings of $140 on your tax liability. You can also add any parking fees and any tolls that you have as well.
There’s an app I recommend downloading to make this super easy called MileIQ. If you haven't already read my blog post that goes over my five favorite tech tools to automate your business finances, go check that out because I give you a very in-depth review on MileIQ.
Home Office Deduction
I will note that you can only use this deduction if your business shows a profit for the year, but it can save you hundreds in tax savings. There are a few things you'll need to collect in order to claim this deduction, and a few rules as well.
The first rule is going to be that you have to have an exclusive place in your home that you use for business. This means you cannot have a corner in your living room with a desk and say that that's your home office because that room is not exclusively used for business. If you have an exclusive place for business, and that could be to conduct business or to keep supplies, then you will be eligible for this deduction.
There are two ways to claim it, and in both ways, you're going to need the square footage of your house (that's heated square footage), and you also need to know the square footage of the room that you're exclusively using for business.
The two ways to claim this deduction are to either use the standard rate that the IRS gives you for your square footage, or you can claim the actual expenses. I personally recommend that you always figure out the actual expenses to make sure which deduction is greater.
The deductions that you're going to need are your rent and mortgage, utility expenses, lawn care, repairs, insurance, and property taxes. If you do repairs on the part of the home that you exclusively use for business, make sure to keep that separate from the repairs that you do on the whole home. This will be a deduction that you won't normally put into your bookkeeping software, but I do have a free cheat sheet with a spreadsheet for the home office deduction, so make sure you download that as well.
Professional Gifts
Not only is this one overlooked, but there's lots of confusion about what you can use. When you think of professional gifts, I want you to think about gifts to clients, colleagues, referral sources, consultants, coaches, mentors, anybody that you have a business relationship with.
Sometimes we're friends with the people that we're in business with as well. But I want you to be clear about your relationship. Think about how the relationship started and what do you mainly talk about. If you determine that you talk about your friends, your family, your kids, and more personal things, then those deductions will not count. But if you talk about mainly business - how to grow your business, how to refer people to your business, to their business, then these deductions will be able to be used.
The IRS rule is that you're able to deduct up to $25 per person per year for professional gifts. So you can spend more but you can only write off $25 per person per year. As an example, if you have 20 people in your circle that you have given professional gifts to and you're able to deduct $25 per person, that's a $500 tax deduction for you to use. At a 25% tax rate that is equal to $125 in tax savings.
Tax Preparation Fees
These fees are the cost of hiring someone to prepare your business taxes. This can only be written off if you have a business, as a business deduction. This is no longer deductible if it's only for your personal return. I hear very often that it costs them much to hire a preparer when you can just do it yourself, and I've also done a blog and video on whether or not you should DIY your taxes, so check that one out.
I want to give you an analysis of this: Say your tax preparer charges you $500 to prepare a tax return. That's a $500 deduction on your business return. And at a 25% tax rate, you're saving $125, which means to me that you only paid the preparer $375 ($500 minus $125) to prepare your tax returns. That's a really big deal.
As a recap, seven amazing write-offs that are often overlooked are:
credit card processing fees
cell phone
home internet
mileage deduction
home office deduction
professional gifts
tax preparation fees
If you look at just these few examples that I gave you, between the cell phone saving $315 in my scenario, home internet saving you $216, mileage saved $140, professional gifts were $125, and then $125 more for tax preparation - with only these examples, I showed you how to save almost $1,000 in tax saving. That's insane.
So make sure that you are writing off all your deductions. If you're going to DIY your taxes, that's fine, just make sure that you're not paying Uncle Sam a single penny more than you should. And if you're going to hire a professional, make sure that they know all the latest tax laws and all the deductions that you can claim.
If you have any questions at all as you get started, weigh your options, or discern what is a write-off and what is not - don’t hesitate to book a free call with me!
