Brilliant (Tax) Deductions for Your Small Business

Feb 1, 2021

Brilliant (Tax) Deductions for Your Small Business

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Anyone with an entrepreneurial friend or relative has probably heard them say, at one time or another, that they’re going to “write off” an expense. What does that mean? A write-off, otherwise known as a tax deduction, is a business-related expense that lowers the amount of money you owe for your taxes. As long as the expense qualifies, you can subtract it from your total tax bill when the time comes.

The IRS provides plenty of resources to help you ascertain whether or not an expense is deductible—but the onus is on you to do the research and figure it out.

“To be deductible, a business expense must be both ordinary and necessary,” explains IRS.gov. “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. It is important to separate business expenses from the following expenses: The expenses used to figure the cost of goods sold, Capital Expenses, and Personal Expenses.”

Some people might read that paragraph and have very different ideas of what “ordinary” and “necessary” mean. Thus, you have small business owners who attempt to deduct all manner of expenses. Not only is it unethical to attempt to deduct unqualified expenses, but if the IRS catches you in the act, you’ll face stiff penalties.

Here’s a list of some of the most absurd (and illegal) deductions ever attempted:

  • Deducting the money you paid an arsonist to burn down your business
  • Claiming your dog as a dependent
  • Deducting the money you paid for your tattoo as a “medical expense”
  • Claiming your daughter’s wedding as a “business entertainment” expense
  • Claiming your fallout shelter is “preventative medicine”

While you probably have no intention of trying to claim your pet as a dependent or deducting the cost of a fallout shelter, it’s still easy for an honest business owner to get confused by what qualifies for a deduction and what doesn’t.

One of the most common issues is blending business expenses with personal expenses. Small business owners usually have so much overlap in their lives that this delineation can become murky. For example, you might occasionally use your work vehicle for driving your daughter to soccer practice. Thankfully, the IRS provides robust information to help make the crucial distinctions necessary to keep your business and personal life separate on your taxes.

“Generally, you cannot deduct personal, living, or family expenses,” explains IRS.gov. “However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.”

Take time to read through the information provided by the IRS—and you should also always consult with a tax professional before claiming a deduction. They can help you confirm what qualifies and what doesn’t while suggesting additional strategies to help you to lower your tax burden legally. Better safe than sorry, as they say.

About the Author

Grant Olsen

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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