Question: I’ve been an independent media and public relation consultant for almost a year. As a first-time self-employed tax filer, what business deductions am I entitled to?
Answer: The old adage, “It takes money to make money,” goes by another name — the cost of doing business.
Generating revenue requires spending money for materials, labor, advertising and so forth. What’s left is profit — the amount that small business owners always hope to maximize.
For the most part, the tax rules governing business expenses are pretty straightforward.
An expense may be deductible if it is both “ordinary” (common and accepted in your field of business) and “necessary” (helpful and appropriate for your business). Here are a few examples:
• Office supplies — This is an easy one. Pens, pencils, paper, envelopes, copier toner, printer ink all qualify.
• Office equipment and furniture — These are deductible if they’re used exclusively for your business. But here you have a choice. You can either deduct the entire amount in the tax year they’re purchased, or deduct a portion of the expense over several years by calculating the depreciated value. This is known as a Section 179 deduction (for the defining portion of the IRS Tax Code), and also covers off-the-shelf software, business vehicles, property and other qualifying items. Several resources explain Section 179 deductions in full detail: irs.gov, sba.gov, and section179.org.
• Your car — This is an important deduction, particularly for home-based entrepreneurs. Be sure to keep detailed records of business-specific mileage, including date, destination, purpose and miles traveled, especially if you use the vehicle for personal trips. Most small business owners figure the deduction by multiplying the total business miles by the IRS mileage rate. (Note that this rate often changes during the year.) Also be sure to log and keep receipts for tolls, parking fees and transit.
• Your travel — When you hit the road for business, more deductions are available: lodging, cabs, air or train fare, dry cleaning, etc.
The key is the purpose of your trip. If it is entirely for business, then these expenses are 100 percent deductible. If the trip mixes in personal activities or vacation time, then you can only deduct a proportion of those expenses (e.g., one day of business meetings during a five-day trip equals 20% deductible).
• Your meals — While you’re on the road, you may deduct 50 percent of your meal costs. Meals around home don’t count, unless you’re meeting with a client or current/potential business partner to talk business.
Then the 50 percent deduction applies.
Many other “ordinary” and “necessary” business costs qualify as deductions. They include business-related classes, seminars and conference fees; employees’ pay; rent; interest; repairs; retirement plans; and others. IRS Publication 535 (Business Expenses) has complete explanations of all types of deductions, and when they may be applied.
This column is brought to you by the Merrimack Valley Chapter of SCORE, with nearly 70 current and former business executives available to provide free, confidential, one-on-one business mentoring and training workshops for area businesses. Call 666-7561 or visit merrimackvalley.score.org for information on mentoring, upcoming workshops and volunteer opportunities. SCORE is a national, nonprofit organization and a resource partner of the U.S. Small Business Administration.