According to the IRS, deductible business expenses are expenses that are reasonable and necessary for the upkeep of your business. These expenses can be deducted from your taxable income. Typically, claiming these deductions is called a tax write off, or just write off.
It's not always easy to understand which expenses fall into the IRS’s definition of deductible expenses. Here's a look at five commonly overlooked business expenses and some explanations of how to make them work for you.
1. Working from Home
The home office deduction can be one of the most generous business deductions, especially for freelancers. In essence, you get to write off a portion of your home expenses (utilities, rent, and mortgage interest) based on how much space your office takes up in your home. For example, if your office takes up 15% of your home, you get to claim 15% of eligible home expenses.
The most important thing to remember is that you have to use that space exclusively for work. This space must also be your primary place of work, or it must be the space you meet clients in on a regular basis. It doesn't have to be a standalone room—it can be a corner of a bigger room.
If you do a major home repair, don't forget to include those costs when calculating this tax deduction. If you redo the landscaping, put on a new roof or even update your HVAC system, a portion of those expenses are also considered home office expenses.
2. Paying Interest
When you take out a loan to cover business expenses, you can't write off the loan amount, but you can write off any business expenses you cover with the loan. In addition, you can also write off the interest and fees from the loan as business expenses. To qualify, the loan must be used for business purchases and cannot be for personal use.
3. Keeping It in the Family
You can write off the cost of employing family members to work for your business. As of 2017, you can pay your children up to $6,300, and they don't have to file a return. This applies to minor dependents, not adult children. However, to qualify, they truly have to work for your business, and you should pay them a wage that's appropriate for the work.
On top of that, there's a lesser known way to reduce your tax liability through a medical expenses reimbursement plan (MERP). With a MERP, you reimburse your employees for medical expenses, and you get to claim a write off for doing so. However, this doesn't just apply to formal employees, the deduction can also apply if you reimburse family members.
To explain it simply, you hire your family members, you reimburse them for their medical bills through your company, and you claim a business deduction. That process will lower your tax liability more than including the same medical bills in your personal itemized deductions.
4. Enjoying Your Pets
In most cases, pet expenses are personal expenses, and you can't write them off as business expenses. However, there are key exceptions. If your animal helps your business, you can write off the cost of their food and upkeep.
Many people know that they can write off travel costs, but they overlook that they can actually write off even more than that. While you can't write off the cost of driving to your office, you can write off the cost of driving to see clients or going to other work sites.
The IRS provides two different options for this write off, you should choose most financially advantageous for you. You can write off a set amount for each mile that you log for work purposes, or you can write off a percentage of all car expenses (repairs, gas, etc.) based on how often you use the vehicle for work. If you use the car half the time for work and half the time for personal use, you can write off half of your expenses.
To ensure you get the most of your business deductions, consider working with a professional tax preparer. Contact Bell Financial Services, LTD for more information today.