Are you looking for more ways to save on your taxes? Maybe you’re wondering if you’re REALLY writing off everything that you can. The truth is, you might not be because there are a few sneaky tax deductions that small business owners ALWAYS miss.
This week on the Andi Smiles Show I’m going to tell you about 7 tax deductions that most small business owners forget to write off and how tracking these will save you big bucks at tax time.
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Education and Workshops (3:11)
Here’s the thing. A lot of people know that they can write off education and workshops for their business. That’s not something that people are unclear about BUT people are having a hard time connecting which educational things are actually related to their business.
Where I see a lot of people getting lost is when an educational event doesn’t directly relate to a niche. For example, if you’re a wedding photographer and you go to a conference on social media, the biggest question I get is, “Does that count towards my deductions?”
Many of us have a narrow view that education-related expenses are solely dependent on what we do in our niche, but we need to expand our thinking to all of the things that we do in our business. Many of us are solopreneurs which means we are our own Marketing Managers, Facebook Ads Managers, and Web Developers. There are all these ways that we interact with our business outside of our specific skill set in our industry.
If you’re struggling with identifying business-related education, ask yourself this question: Would I be taking this workshop if it weren’t for my business? Would I be taking this course or workshop if I didn’t have a business?
Here’s an example. You might have a Squarespace website for your business and you want to learn how to build better pages in Squarespace. Well, if you didn’t have a business you wouldn’t be taking a Squarespace course, right?
Here’s a different example. I love scrapbooking. I would take a scrapbooking course whether or not I had my business. So that is where I can draw the line between something I love and something that is really directly connected to my business.
Another area of education that people are struggling with is if their startup educational expenses count towards their deductions. For example, let’s say you took a course on how to set up your business prior to taking clients or selling your products and services. Does this count towards your deductions? YES because this is business development.
Any courses, trainings, or workshops that you took prior to making money from your business could be written off. Depending on when you file your taxes this might get put as start-up expenses or regular expenses. Regardless, you still want to keep track of this stuff and talk to a tax preparer about where these would fit in.
We’re talking about this because a lot of people get scared that their business development courses don’t count and they don’t write them off. Let’s be real. These things cost a lot of money. I’ve seen people not want to write off thousands of dollars in education. Keep in mind that you wouldn’t even be taking those courses or trainings if they weren’t for your business and go forth fearless with your deductions!
Professional Gifts (9:00)
Now let’s talk about my second favorite deduction in my whole-wide 90’s loving world. That’s professional gifts!
Many people don’t know that they can write off professional gifts. This one is sort of like the magical unicorn of tax deductions.
So, what are professional gifts?
Professional gifts are gifts that you give to clients, colleagues, referral sources, consultants, mentors, coaches and more. It’s essentially whoever you have a relationship with when it comes to your business.
Our business often becomes our life and sometimes people who are our colleagues are also our friends. I would urge you to really think about if this person is more of a friend or a colleague. Sometimes our friends become our clients too.
Here’s an example. I’m in an advanced coaching program and the people I’m practicing with are slowly becoming my friends. But the basis of our relationship is a business relationship. We met through a professional program. We are connected because we are practicing a very specific coaching skill. We refer clients to each other.
Maybe we’ll go out to lunch but honestly, we’ll probably talk all about our businesses. So that’s somebody I’d put into a professional category. I have self-employed friends that I’ve been friends with for 15 years. I’m not going to stretch that into professional gifts. The point is- be clear about delineation between professional relationships and personal ones.
Some of these gifts are pretty obvious like gifts to clients or if somebody is sending you a lot of referral sources and you send them a gift. A gift, in that case, would be appropriate. Maybe you have a mentor or a coach who’s really helping you develop your business. A gift would be appropriate there too.
Now, there’s something really important to know about professional gifts.
There’s a very strict rule that the IRS has around gifts which is that you can only write off $25 per person per year. So, you cannot just go out giving everybody $100 gifts. It does not work like that. It has to be within a certain boundary.
So, for me, I like to give the gift of a book and a card because it’s the perfect gift under $25 and it’s realistically what someone would give as a gift to a business acquaintance. There’s a lot of different gifts that you could give somebody but just make sure you follow the $25 per person per year rule.
Here’s why you want to keep track of this…
Let’s say that you have 20 clients and at the end of the year you send all of your 20 clients a gift of $25 dollars. That’s $500 in tax deductions!!!!
That’s a lot of money that you could be leaving on the table. While it might look like it’s not a lot in terms of each gift only being $25 per person per year, if you think about that in terms of volume and you multiply that, it actually adds up to be quite a bit.
Local Transportation (12:52)
This is another one that I love that most people are completely unaware of being able to write off which is local transportation. Most people have never heard of this because they’re so focused on the travel part of tax deductions. I’m sure all of you have heard that you can write off your airfare, lodging, and ground transportation for business travel, but local transportation is a hidden gem in business travel.
This transportation obviously has to pertain to your business you can’t just be going out to the bars on a Friday night and call that business transportation. It needs to have something to do with a business activity. If you’re somebody that takes like Lyft’s, Ubers, taxis or even public transportation like the bus or train to client meetings and meetups for business, you can write it off as a local transportation deduction!
Now, I want to say a caveat here, which is that when we say ‘for business purposes’ you have to remember that there is something that’s considered commuting. This is traveling from your home to your principal place of business and anything that’s commuting can’t be written off! So if you take Lyft from your home to your office- that doesn’t count. But if you take Lyft from your home to a business lunch- that is local transportation.
Mileage, Parking, and Tolls (15:45)
Ok. You got me. I kind of cheated here because I put three in one but they all kind of work the same way. Most people think it’s a total waste of time to track their mileage. I am here to tell you, it is not a waste of time to track your mileage! If you drive more than one time a week I highly encourage you to start tracking your mileage.
Business mileage is any place you drive for your business that is not your principal place of business. When we say your principal place of business, that is a place where you conduct the majority of your business activities.
If you’re a hairstylist and you have to drive to the salon where you rent your chair, that salon would be considered your principal place of business and you can’t write off your mileage from your home to the salon.
Business mileage is everywhere else you drive. So, if you drive from your home to a salon supply store to buy supplies that will be business mileage. If you drive from your home to a wedding where you’re meeting somebody to do their hair, that would be business mileage. If you’re driving from the salon to a meeting with some product demo people, that would be business mileage.
Remember, driving from your home to your principal place of business is not deductible but driving anywhere else is. When we say everywhere else, we’re talking about errands, client meetings, meetings with colleagues, or driving to a workshop for your business. There’s a lot of ways that we drive for our business that we don’t realize and this is why I say writing off your mileage is not a waste of time. We actually tend to drive a lot for our business but we don’t realize it.
What happens if your home is your principal place of business?
I do 90% of my business work in my home office. In that case, if your home is your principal place of business, then everywhere you drive is business mileage. You’re in luck because you will have more business mileage.
Here’s how business mileage works on your taxes.
The way that it works is that you’re going to track how many miles you drove for your business and then you multiply that by the IRS rate. The rate changes every year.
Here’s an example. Let’s say you drove a thousand miles for your business in one year. The IRS rate for last year is 53.5 cents per mile. The deduction you get on your taxes is $500.
Drive 1000 Miles for Business x $0.53.5 IRS rate = $500 Tax Deduction
But here’s a little bit more math, to put things in context: If you drive 1000 miles a year that breaks down to be 83 miles a month and if you drive 83 miles a month that breaks down to be 20 miles a week. If you drive 20 miles a week and you have a five-day work week, that’s four miles a day. It’s actually pretty conceivable that you could drive 1000 miles in a year.
If you drive more than four miles a day, you can see how this adds up to amazing tax savings!
Now let’s talk business parking.
No matter how you write off travel with your car, you always get to write off your business parking.
If you are parking for business purposes, feeding the meter, or parking in a garage you get to write that off. The only time you don’t write off these type of expenses is if you’re parking at your principal place of business.
You can also write off your tolls.
Again, this is not to and from your principal place of business. If you have bridge tolls on the way to your salon, that’s not going to count. Any other parking and tolls that you incur when you’re driving for your business counts, which is pretty cool because tolls and parking are both expensive.
How in the heck are you supposed to keep track of this stuff?
By first glance, it’s easy to feel as though this would be extremely complicated to keep track of but you can use my favorite mileage tracking app which is called Mile IQ. There’s a couple things I really love about this app. First of all, it’s free for the first 40 drives.
The other thing I love is that it has drive detection. With drive detection, the app actually recognizes when you drive and then you can go through and just swipe left or swipe right to categorize the drive as business or personal mileage.
You can also half-swipe. When you half-swipe, it gives you a window where you can type in what the purpose of the drive was. This is helpful if you want to keep really detailed notes. Now, here’s the part I love… You can put in your tolls and parking. This is really helpful because if you live in place with a lot of bridge tolls they have like those passes that automatically deduct from your account. You’re not really paying for cash so it’s not as easy to track it. I think this is the best way to keep track of those bridge tolls.
With business parking I recommend you use your business card as much as possible.
If you have access to parking meters that allow you to take credit cards, just use your business card. If you live in a place where you have to use coin-operated meters, you can track that in Mile IQ to keep track of it.
Credit Card Processing Fees (27:25)
OMG! People always forget that this is a write off!
These are the fees that you pay to Square, Stripe, PayPal or whoever it is that is processing credit cards for you on your behalf.
This fee is usually 2.9% plus $0.30, which is pretty standard. This fee gets withdrawn from your balance before they put it into your account. What’s happening is that you’re paying this company for the service of processing a credit card for you. That’s what that fee is for- they are charging you to use their service of processing credit cards which is a straight-up business expense.
The mistake that most people make when they’re dealing with credit card processing fees is they just call whatever is left over their income. So if you process $100 and there’s a $5 fee and $95 is what’s left over; most people just categorize that $95 as income. This is actually NOT the correct way to capture this because what happens is that your gross income doesn’t match what the credit card company is processing.
Let’s talk about how this actually works and how it should be done properly so that there’s no disconnect.
Let’s say you processed $100 for a sale and someone uses their credit card. $100 is your income. There’s $3.20 that the payment processor takes out. This $3.20 is an expense. You’re going to call that a credit card processing expense.
What’s left over is just the net of what you earn, which in this case is $96.80.
$100 (Income) – 3.20 (Processing Fee) = $96.80 (Net of What You Earn)
There are several reasons why you want to categorize these things properly.
If you’re running reports on your income and you’re calling the $96.80 your income, your revenue is not going to be accurate- which means you’re not going to have all the information you need about your money to make smart business decisions.
Cell phone (32:26)
This deduction is a percentage of your personal cell phone you write off for your business. It’s not the whole thing. It is a percentage and the percentage is how much of that cell phone you are using for your business. Most people don’t write off their personal cell phone because they don’t understand how to and it actually adds up to be quite a bit. (Psssst- learn more about split tax deductions here)
The first step is to decide your business phone use percentage. Don’t just say 100% because there is no way that you never use your personal phone- ahem- personally. I don’t like to go over 70% when I recommend this to people. To me, 70% is the ceiling because we have to be realistic with ourselves. We go on Facebook. We look at our friend’s pictures of babies and scroll through Instagram. Remember when we use our cell phone it’s not just talking and texting. We’re using the data on our cell phone to check our e-mail, check messages and post on our business social media pages.
After you figure out your business use percentage, figure out what the portion of your bill is actually for YOU. A lot of us are on family plans so keep in mind you can only write off your portion of your cell phone bill.
In the last step, you are going to track the deductible portion of YOUR portion of the bill. You’ll take your portion of the bill and then you’re going to take the percentage which is your business percentage and that’s what you’re going to write off.
Let’s do an example.
Let’s say that in step one, you decide that your cell phone use for business is 50%.
In this example, you cell phone bill is $220 and there are two people who use it- meaning you share this bill with someone else. In this case your portion of the bill is $110.00. When you multiply your portion of the bill ($110) with 50% (0.50), that’s $55. Let me tell you it adds up quick because $55.00 a month is $600 a year in tax write offs!
I know this takes a little bit of upfront work but after you figure out your portion of the bill, you can just keep an ongoing monthly log to hand off to your tax preparer.
Home internet (37:17)
Regardless of if you take home office or not, you can still write off a percentage of your home internet. Just like your cell phone, you write off the business percentage of your home Internet use.
Now, here’s the thing about this: When you’re figuring out your percentage of your home Internet, keep in mind that often we use our home internet to watch TV, including Hulu and Netflix. Be honest with yourself about your percentages.
The first step of figuring out your deduction is just like the cell phone deduction. Figure out your percentage with honesty and, if you’re nervous about this stuff, go a little bit lower than what you really think. Going 5% or 10% lower is ok.
Here’s step two. Figure out what portion of your bill is the internet portion. This is a little bit different than the cell phone. A lot of times people’s internet is bundled with TV so calculate what portion of the bill is the internet portion. The good news is usually the internet portion is pretty static. Once you figure that out the first time you can continue to use that number again, and again.
Next, you’ll figure out your portion of the bill. The next step is the same as a cell phone bill example. Finally, you are going to track the deductible percentage of the internet portion of the bill.
Let’s do the example together again.
Let’s say that you decide that you use your home internet for business 60% of the time. Then you look at your bill and your bill is $200 dollars. $110 of that bill is for TV.
$200 (Total Bill Amount) – $110 (TV Portion) = $90
$90 is what you are paying for internet and then it’s just you so we have one person. Now the calculation is $90 x 60% (0.60) which is $54 a month. Again, over the course of a year that comes up to be about $500 a year! So, if you have not been tracking your cell phone and your home you should start because as you can see these all deductions I’ve covered can really add up to save you thousands.
Those are the seven most commonly missed tax deductions. Now, there are many tax deductions that exist in this world. I cannot go through them all but I have a cheat sheet that I’ve made to help you! Go ahead and get yourself access to a little more tax deduction goodness. Enjoy!