Photo by Jose Aljovin
Disclaimer: I'm not an accountant and this isn't tax advice.
Updated February 2018
Alright, alright, alright. Nothing signals the start of tax season like a bunch of creative freelancers emailing me questions about what they can write off on their taxes. But first, maybe you're wondering, "What is a tax write off? And what's the difference between a tax write off and a tax deduction? Is there a difference?"
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What is a tax deduction? What is a write off?
A tax write off is a tax deduction and a tax deduction is a tax write off. Different names for the same thing. And sometimes people refer to this as "expensing".
A deduction is an expense you have as a result of doing business that usually helps reduce your taxable income. And most people would agree (I'm sure some would disagree) that reducing your taxable income is mad sexy because you reduce your tax liability. In other words, a deduction should help you pay less in taxes.
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Reporting The Deductions
For most deductions, tax payers are only required to give the amount and the description of the deduction. Proof of a deduction only happens when the IRS or state department decides to audit you and/or your business.
There are different schedules that your accountant will file to report the different deductions. For example, itemized deductions (Schedule A), business deductions (Schedule C) and deductions related rental real estate (Schedule E).
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Business Deductions
If you're self-employed, the IRS says you can deduct "ordinary and necessary expenses" that relate directly to your self employment income. It doesn't matter if you are a sole proprietorship or if you've established an LLC, the same types of deductions are available to you.
Let's unpack the "ordinary and necessary expenses". Ordinary means the expense must common in your industry. For example, if you're a screen writer, then it's common for those in your industry to watch movies for research, so you may be able to write off your movie theater tickets for research (check with your accountant).
Necessary means that the expense helps you generate revenue for your business. For example, if you make leather goods, the cost of the leather to make the said goods is a necessary expense that helps you generate revenue. Cool?
Always check with your accountant about what they think is appropriate to write off. In general, you can't write off personal expenses that have nothing to do with your business. You generally can't write off all of your rent expense.
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Possible Deductions for Taxes
Here's a pretty standard list of deductions for business owners:
Capital Expenses
- Depreciation
- Costs of Goods and Services
- Startup and Organizational Costs
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Self-Employed Expenses
- Health Insurance Premiums
- Moving Expenses
- Retirement Plans
- Self-Employment Taxes
- Student Loan Interest
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Standard Business Expenses
- Advertising
- Bad Debt
- Bank Fees
- Car and Truck Expenses
- Charitable Donations
- Conventions and Trade Shows
- Education
- Insurance
- Intangibles
- Interest
- Home Office Deductions
- Legal, Accounting and Professional Fees
- Maintenance, Repairs and Renovations
- Meals and Entertainment
- Non-Cash Gifts and Rewards
- Office Supplies, Tools and Services
- Qualified Business Income
- Rent and Property Leases
- Research and Development (R&D)
- Salaries and Wages
- Utilities
- Taxes
- Travel
- Software
This list doesn't include everything you can deduct. Remember, it depends on your industry. And some expenses might not be entirely deductible. For example the general rule with meals and entertainment is that you can only deduct 50% of what you actually spend.
If you need help getting your bookkeeping done before you hand off the data to your accountant, we can help.
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Your Accountant: The Lifeguard at the Pool
Always consult with your accountant. You should track every business expense and review them with your CPA to make sure you're only taking legitimate deductions. Tracking your expenses via bookkeeping helps you keep a record of your expenses in the event of an audit.