As an entrepreneur, you know that every dollar counts, so today we're taking a deep dive into a topic that can save business owners thousands of dollars: deductible business expenses. In this episode, we'll cover what makes an expense deductible, the savings that come with deductions, unexpected deductions, and the importance of bookkeeping. By the end of the episode, you'll have a clear picture of how to make the most of your expenses and keep your money in your business.
Deductions are powerful. Every dollar you deduct reduces your taxable income, directly lowering the amount of taxes you owe. However, in order to deduct a business expense, two key rules must be satisfied: the expense must be ordinary and necessary.
To be ordinary, the expense must be common and accepted in your industry, such as a yoga mat for a yoga instructor. To be necessary, the expense must be helpful and appropriate for your business operations.
Before you write off something, ask yourself whether a business like yours typically needs this type of expense and does it serve a legitimate business function? If the answer is yes, you may have a deduction on your hands.
While rent and office supplies may come to mind as deductible business expenses, consider whether these unexpected events apply to you:
Pet expenses -- If a dog protects your office or warehouse, the dog's food, training, and vet bills may be deductible.
Coaching -- Hiring a business coach, taking leadership training, and even going to therapy for stress management related to business all might qualify as expenses needed to run and lead a company.
Your home office -- If you have a dedicated space in your home exclusively used for business, you can write off some of your rent, utilities, and internet costs.
Marketing and promotions -- Hosting an industry event, running a giveaway, collaborating with influencers, and paying for digital ads all count as deductible expenses as long as they are directly tied to promoting your business.
Work-related attire -- Buying branded uniforms or specialized attire for your business are legitimate business expenses.
Business retreats -- If you take your team on a business retreat to strategize and improve company culture, that expense could be deductible. Make sure you document the business purpose with an agenda and good notes.
Without solid record keeping, you might miss valuable deductions or struggle to justify an expense in the event of an audit. Here are some tips to keep your books in order:
Separate personal and business finances -- Keeping separate personal and business bank accounts and credit cards makes tracking deductible business expenses much more manageable.
Use accounting software -- Accounting software, such as Quickbooks or Wave, can help automate tracking, helping to ensure nothing gets overlooked when tax season rolls around.
Save your receipts -- The IRS requires proof of deductions, so keep digital or physical copies of receipts and invoices.
Work with a professional -- A professional bookkeeper or accountant can help you keep your financial records accurate and compliant.
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Brian Thompson, JD/CFP, is a tax attorney and Certified Financial Planner® who specializes in providing comprehensive financial planning to LGBTQ+ entrepreneurs who run mission-driven businesses. The Mission Driven Business podcast was born out of his passion for helping social entrepreneurs create businesses with purpose and profit.
On the podcast, Brian talks with diverse entrepreneurs and the people who support them. Listeners hear stories of experiences, strength, and hope and get practical advice to help them build businesses that might just change the world, too.
