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Deductions for Small Business

Collin Gabriel February 2, 2022

Marissa Danley (00:00):

All right. Common deduction. This is the fun part. To me, it’s like a little game where you find all the things. So when you’re in business for yourself, um, there’s a lot of deductions, there’s a lot of things that we can think about. We can think about things like advertising. So if, uh, you know, business cards, any sort of advertising that you do that’s a deduction, commissions and fees. So if you do have, you know, bank fees or anything like that, we can write those off contract labor. So this is you paying somebody else to help you. That becomes a deduction there. Your business insurance, Melissa? Yeah,

Speaker 2 (00:36):

It looks like we got a question in the chat. Can you speak to Schedule F?

Marissa Danley (00:42):

Sure. Um, I’ll touch on Schedule F. So Schedule F is for farming income. And farming income from a tax perspective is done just the same way as this business income on the Schedule C. So we would take your income and then we would take your deductions, and then what is your profit? Is what you’re gonna be taxed on. It’s still that 30 to 35% we’re gonna file all the same tax returns. Um, and even a lot of the deductions are the same. So, you know, schedule F you’re in farming and agriculture, so you’re probably gonna have a little bit different deductions, but they kind of all fit into the same, same area. Um, and again, the tax process is exactly the same except we do what’s called a Schedule F instead of a Schedule C. Um, does that answer the question?

Duane Lane (01:27):

It wasn’t for me, but I, it applies to me. So yes, you did

Marissa Danley (01:32):

<laugh>. Thanks Dwayne. Appreciate it. Okay. I can’t really see everybody, so I don’t know. Yep. What’s going on. And

Duane Lane (01:39):


Speaker 2 (01:39):

Chat it says, and then yeah,

Duane Lane (01:41):

In the chat it says, yes. Thank you.

Marissa Danley (01:43):

Great, thank you. Um, that’s a very good question. No one has actually ever asked me that before, so I’m impressed. Uh, okay. Deductions insurance. So business insurance, not health insurance. Health insurance is a personal deduction. Business insurance is a business deduction. Um, dues and subscriptions. So if you belong to any organizations or you know, you have, um, at a subscription to a professional organization, that would go there too. Legal and professional. So that’s me. Tax preparation as well as, you know, let’s say you talk to a lawyer about forming your L L C, anything like that would be a deduction office expense. Um, this is not your home office. What I mean here are things like pens, paper calculators, anything that you would use to to do office work. Um, rent or lease. Again, not your home. We’re gonna cover home office in a little bit.

Marissa Danley (02:35):

This is if you are renting a storefront or a restaurant space. So anything that you’re paying for that you rent or lease, um, even like day, co-working spaces, machinery, that sort of thing would go in here. Um, repairs and maintenance. I work with a lot of contractors. They repair their tools. They work with a lot of filmmakers. They repair their, their gear. So anything like that would go in there. Um, supplies, that’s generally job supplies. So, um, you know, whatever you’re doing, if you need to go out and buy a supply specifically for the job, it would go in there. Wages, if you do have an employee on staff, the wages that you pay them are deductible. And then taxes and license. This one I get a lot of questions about. So license, yes, in terms of like a business license, absolutely. Taxes, though, your personal tax payments, those are not a deduction.

Marissa Danley (03:27):

So when I, when I say that, you know, we talked about four different taxes here in Oregon. We said the federal, which includes your self-employment tax, the Oregon the tri met, and then the city and county. The city and county and trim are specifically business taxes, but your Oregon and your federal payments are not. So those are not a business deduction. Um, meals, if you’re meeting with somebody or traveling, that’s a, a potential business deduction. And then utilities, things like a cell phone, internet, anything that you directly use for your business. Um, also education and research. So if you go to a conference, if you buy a book, um, pay for the New York Times so you can read articles that can potentially be a deduction as well. So let’s move

Speaker 2 (04:17):

On the question in the chat.

Marissa Danley (04:18):

Yeah. Okay.

Speaker 2 (04:19):

So, uh, AC says, so if I have a W2 from an employer, I’m filing that and a schedule sh uh, schedule C.

Marissa Danley (04:29):

Yes. So

Marissa Danley (04:32):

When we think about a tax return, we just kinda think about a tax return, but there are multiple things that go on in that tax return. So you’ve probably heard of a form 10 40. That is what a person will file the 10 40 form. But what I like to call that is the home base form. There’s all these other forms that we do that feed into that 10 40 home base form. And so what we do is we do what’s called a Schedule C, and that is where you put your business in your income, uh, business, your income and expenses. And then that gives us what’s called a net profit. We combine that with the W2 on that home base form, and then that covers your entire tax picture. So it does get put in there together. It also would include any income from a spouse. Um, anything that you maybe have interest, dividends, retirement income, unemployment, all of that’s gonna go on the same tax return as your business income when you are a sole proprietor or a single member. L L C.

Speaker 2 (05:38):

Oh, uh, okay. So we, Ashley is asking, and I’m sure it relates to the common deductions, uh, she’s asking about mileage.

Marissa Danley (05:47):

We’re gonna get there.

Speaker 2 (05:50):


Marissa Danley (05:50):

We’re definitely gonna go talk about that one. Thank you. Anything else before I jump into home office? Awesome. Great questions. Okay, so here’s the deal with the home office. So home office and mileage are the two questions I get the most. Um, here’s the deal with home office. It has to be regularly and exclusively used for business. So it can’t be your kitchen table if you ever eat dinner there, it’s not exclusive. It can’t be your guest bedroom because they might have guests staying there. So it technically has to be regularly and exclusively used. Um, and the, the term office is, is kind of loose here in the sense that it doesn’t have to be a specific, um, office. It could be just maybe you have a desk in your living room and that’s what you use for business. So it could be the square footage of your desk.

Marissa Danley (06:40):

Um, during covid, I had a lot of clients build a deck and they were, you know, meeting with clients out there and then they covered the walls and that became their office. So as long as it’s exclusively and regularly used, you’re good to go. Um, so what we do in order to clean this is we find a percentage. So here’s a little bit of math. We find a business use percentage and the way, well, let me back up before, before we do the math, cuz that’s the hard part. But basically we’re gonna find a percentage and then we’re gonna take a percentage of your mortgage interest or your rent. We’re gonna take a percentage of your, in your insurance, if you pay insurance, a percentage of property tax, if you pay property tax, and then a percentage of your utilities. So let me give you an example and walk through it.

Marissa Danley (07:31):

Oh, repairs too can throw in there. So let me give you an example and we’ll walk through it. So let’s say you do have a dedicated office. Your dedicated office is a hundred square feet of your house and your whole house is a thousand square feet. I like easy math, so that’s why I picked these numbers. So your whole house is a thousand square feet. You use a hundred square feet for your office. So 10% of your living space is purely business use. So what we do then is we take 10% of what you’ve paid in rent. And let’s say you paid $12,000 for the whole year for rent. Let’s say you paid 3000 in utilities for the whole year. So your living costs were 15,000. And I know that’s, that’s probably not realistic, but again, easy math, 15,000 is what you paid.

Marissa Danley (08:24):

10% of that was business use. Remember we have the a hundred square feet over the thousand square feet, which gives us 10%. So what you get then is a $1,500 deduction. So that is your business deduction for your, um, business use of home. Does that make sense? Yeah. Okay. So moving on then with travel, again, people are out traveling, it’s, it’s great. Let’s say that you’re traveling for business. Um, you take a flight somewhere that’s a business deduction. You go to a conference, you pay for some hotel lodging, Airbnb, that is then a deduction. Uh, any transportation while you’re traveling. So, you know, uber, taxi, bus, train, that’s all a business deduction. And any fees that you might had to pay. So any baggage fees or let’s say, well, I can’t think of any other fees on the top of my head, but if there’s a fee incurred with traveling, it’s generally gonna be a business deduction.

Marissa Danley (09:26):

Um, people usually ask me, well, what if I travel for a conference but then I spend three days with my family, um, and then I fly home think, well, you know, you can ride off the flight because the main purpose is for bi for business. And then you can ride off the portion of the expenses that you’re using while you’re in the conference. So let’s say you go to a conference for three days, visit with family for two days. You can ride off three days of hotel, three days of meals, three days of transportation, um, but not the two days that you’re spending with family. So, you know, makes sense. The business time is what you can write off the family time, you can’t. Um, and then same thing with meals. If you’re traveling, you gotta, you gotta eat. So we can can write those off as well.

Marissa Danley (10:13):

Um, okay, we’re gonna get to the miles. So there’s two ways that we can do mileage. We can either take what’s called a standard mileage allowance or a percentage of actual expenses. Um, remember we just talked about home office and we talked about the business use percentage. That’s what we’re gonna do here as well. When I say percentage of actual expenses. So the easy way to do this is to take a standard mileage allowance. So you’re gonna track your miles and you’re gonna record how many miles you use for business. And then we’re gonna give you an allowance. So let’s say you drive, you know, a thousand miles for, uh, business, you are gonna get a certain deduction for that. So the IRS and Congress changed the rate on us this year, halfway through the year. So it’s a little bit more complicated with my math, but generally if you drive a thousand miles, that’s gonna equate to around a $600 deduction on your taxes.

Marissa Danley (11:13):

The key here is you have to track those miles from your first business location to your second or to your last business location of the day, which we’re gonna do an example in a minute, but track, track, track the miles, it’s a really good, uh, deduction. So that’s the easy way to do it. So with this, we don’t write off gas, we don’t write off insurance, we don’t write off any actual costs except for parking. Parking, you can still take, but we just give you an allowance based on the mileage. That’s it. The other method is called the actual expense method. And this is where we’re taking things like your insurance. We’re taking your gas receipts, we’re taking interest on the payments if you’re making payments, repairs and maintenance and parking. Um, what we do here though is we find that business percentage, so let’s say that you drove a thousand miles for the year total, not just business, a thousand total and 200 of those were for business.

Marissa Danley (12:13):

So 200 miles out of a thousand miles, that’s 20%, that’s your business use percent. So we would take 20% of your insurance, we would take 20% of your gas, 20% of all the other expenses, and that’s what your deduction would be. Um, the way that we find that percentage, again, is based on the mileage. So what I, what happens here is you still have to track your mileage in order to claim those actual expenses. So either way you’re gonna be tracking your mileage, that’s the key. Um, and then we would look at them and we would see which is better for you in your situation. Nine times outta 10, the standard mileage allowance is, is better for people. But if you have a business, you know, tow truck, something where it’s really focused on driving in that vehicle, that expensive vehicle, it might be better to take the actual expenses. Um, questions?

Speaker 2 (13:09):

Quick question. Yes. So, uh, Dean says that, uh, they’ve heard that there may be a downside to claim the office space deduction on a home they own and live in, um, possibly affecting the value of the home if you wanna sell it.

Marissa Danley (13:24):

Oh, that is a very good question. Whoever, whoever said that has had somebody talk to them or they’ve done research, that’s great. So real quick, uh, it’s, it’s a fairly complex equation. So I’m gonna just give you the overview. So when you own the home and you have an office space, we can what’s called depreciate the value of the home. And so what that means is that we are writing off part of the purchase price of the home every year. Um, when you go to sell it, what that means is that you could potentially pay more tax than you would because you’ve already expensed part of the home’s value. Um, I, this, I used to teach a whole 12 hour class on depreciation alone. So it might be a little too technical to get into, but long story short, yes, if you are expensive part of your home office and you own the home, it can potentially have tax consequences when you sell it. They’re usually not significant because the home office percentage is so small, but it can potentially affect it. Um, and whoever asks me that, I’m more than happy to chat with you later on if you wanna get into more details. But, but you’re correct. It can, it can affect it.

Speaker 2 (14:44):

Awesome. And one more question from Roberta. Uh, she’s asking what if the home office is, uh, an out building on the farm, not under their home roof, but still on the home grid with energy and wifi?

Marissa Danley (14:59):

Um, then we would have to allocate it out based on percentage of use. We’d have to find a method to allocate the utilities that are being used out there. Um, what we would probably do is we would include the square footage altogether. So let’s say main house is a thousand square feet, the supplemental house is a hundred, we would find a a percentage there. Um, it also could be that maybe the the other house, you know, the supplemental house has more energy use usage because it has a specific purpose. So we would look at that too. Um, yeah, there’s definitely ways to look at that that are not just as straightforward as my example. Does that help anymore?

Duane Lane (15:47):

I just have a comment, um, to look at the time.

Marissa Danley (15:51):

Yep, next year I think we should make this two hours cuz I just have too much fun talking about this stuff. All right, I’m gonna keep going. So again, back to auto and mileage, you must keep a mileage log no matter which method you use. And what you do is you track from your first stop of the day to the last stop of the day, everything else is considered commuting and personal. So let me give you just a quick little example here. So let’s say this is your home office. That’s your first stop of the day for business. You drive two miles to the supply store, you drive two miles to your client’s house, you drive four miles to your kid’s school and then you drive three miles back home. Here’s what you can take. You can’t take this, you can’t take that because the first stop of the day was your home office and the last stop of the day was your client’s house.

Marissa Danley (16:45):

So your deduction here is four miles. Now if you had instead gone home from your client’s house and let’s say that was five miles, you now have a deduction of nine miles. So first top of the day to the last stop of the day, however you wanna do it, that is what you write off for your mileage meals. I’m gonna kind of zoom through all of the rest of this. So if I do go too fast, if we miss something, again, feel free to get in touch with me for meals. If you are in town not traveling and you’ll meet with somebody else to talk about business, uh, first of all it has to be in a quiet location. I don’t know why, but that is one of the regulations. You have to be in a quiet location. You can then write this off as a business expense.

Marissa Danley (17:33):

It used to be limited to 50%, that was what you could write off for the expense. But for 2022, and this is in response to Covid, if you are eating in a restaurant, the deduction is 100%. So we get to take that for 2022 going forward. It goes back to that 50% deduction. If you’re traveling, you can be by yourself. You can potentially take what’s called a per diem instead of the actual expenses. That means just a standard allowance based on your location. And again, that was limited to 50% in the past, but for 2022 we’re back to a hundred percent. Um, inventory. I’m gonna kind of blaze through inventory and the calculation. Generally you’re doing inventory. If you are making things for resale, you won’t have a cost of good sold unless you’re carrying inventory and you don’t need to worry about it. In that case, if you don’t have inventory, you’re not carrying things to sell. Um, the other thing is you don’t really need to worry about inventory unless the average item that you’re selling is above $2,500 and your average annual gross receipts for the past three years are under 25 million. So unless you’re hitting those thresholds, you don’t really need to go through too much inventory, uh, calculations.

Marissa Danley (18:53):

So depreciation, this is something that we just touched on when we were talking about home office. So I’ll give you a quick little overview to help, uh, again, illustrate that home office example, but maybe a couple other things too. So I live my life in terms of the real world and then tax land. So in the real world we think of something, uh, we think of depreciation as something losing value. So we have appreciation where it gains value depreciation where it loses value. It’s not true in tax land. It’s an entirely different meaning. And what it is, is it’s a cost recovery system. And so that’s just a fancy way of saying, oh hey, I’m gonna use this item for five years, let me expense it over five years. I get to write it off as long as I’m using it. Um, and I’m gonna give you an example here in a second. So basically anything that costs more than 300 bucks and will be used more than a year, we could potentially wanna depreciate it.

Marissa Danley (19:55):

So lemme give you a quick example. So let’s say that you buy a new computer for 500 bucks on January 1st. The IRS says that the computer will last five years. So rather than writing that $500 off all in one year, what we’re gonna do is we’re gonna spread it out over time. So I know we said five years, but it lasts for six, don’t know why, but there’s six years that you get to deduct a portion of that computer. So each year it’s gonna go down a little bit what that deduction is, but we would just spread it out. And a good reason to do this, um, is because it, it, it can help with tax planning. So that being said, you know, if I’m not making a whole bunch of money in year one, I don’t necessarily need that whole $500 deduction. So it can help us by spreading it out and taking a deduction in years when we’re actually making more money.

Marissa Danley (20:51):

So that being said, we can’t appreciate some things for those tax planning purposes and some things we can’t. So back to that home office example, if we’re writing off a portion of our house each year, that’s something that we cannot just do in one year. So let me back up and make myself real clear here. When I just showed you that computer example, we can depreciate that over those five or six years if we want to, but we could also write that off in one year and that’s where that tax planning comes in. But in some cases we can’t write it off in one year. The IRS just says we can’t. So anything that is a real property. So if you own a rental property, you can’t write the whole expense off in one year, you have to spread it out and depreciate it. Um, but there are some things that we can expense rather than depreciate.

Marissa Danley (21:44):

So that computer example, maybe one year all of a sudden, you know, I was featured on the Super Bowl commercial and my business went crazy and I made a whole bunch of money. Well, maybe I wanna go and buy some equipment and I wanna write it off all in one year to reduce that tax liability. So in that case, I’m gonna buy all the junk and I’m gonna write it off rather than depreciate it, you know, because it’s a year I’ve made a bunch of money. If I’m just starting up or I don’t have a lot of income, maybe I do wanna depreciate it and spread it out over a few years. So I’d get that choice if it’s something other than um, an actual structure.