Deductions for Small Business
Um, okay. So now that we’ve talked about taxes, what that is, how they work.
Marissa Danley (22:36):
We’re gonna talk about deductions. People wanna know about deductions a lot. There’s a lot to it. Um, so right now I’m gonna go through some of the common ones and then I’m gonna dig in deep a, a little deep about some of the more complicated ones. So first off advertising, anything that promotes your business, uh, you know, you buy a Facebook ad or, or any, you know, you make business cards, anything that promotes your business is an advertising expense, commissions and fees. You might have to pay, uh, a fee. If you are a vendor at a farmer’s market, you might have to pay a, a square fee or a credit card processing fee, a bank fee. So all of those are gonna be deductible as well.
Marissa Danley (23:20):
Contract labor, you are paying somebody to help you. Basically, you don’t have an employee, you’re paying someone to help you do whatever it is you’re doing. And uh, you write it off as an expense. This is when you would maybe issue them that 10 99 that we talked about earlier, business insurance, that’s a write off dues and subscriptions. Um, if you belong to a professional organization and you have to pay a membership to, uh, that could go in there, legal and professional. If you consult a lawyer to write up your business plan, a business contract, if you pay for tax prep, those are the kinds of professional services we’re talking about office expense. I’m not talking out your home office. I’m talking about, uh, pens, paper, those kind of office expenses that you might have. Um, this would also include office rent. If you were renting outside of your home, well, there you go rent or lease again outside of your home, um, repairs and maintenance. So you had a computer that broke down, you had to take it to the shop and get fixed. Um, maybe you’re a musician and you’re a guitar breaks. You gotta go get that, fixed. That what goes under, under repairs and maintenance, again, not home repairs and maintenance. That’s separate. This is just, um, job related repairs and maintenance.
Speaker 3 (24:44):
May I ask, um, for the, the repairs and maintenance. So if you have a business vehicle that you use, um, to either procure your goods or your services, or take them to, let’s say the market that you might be working at or deliveries, um, so those kind of repairs and maintenance that’s done on that vehicle are those, um, common deductions.
Marissa Danley (25:05):
Great question. Very great question. Um, we are gonna talk about automotive expenses here in just a minute. Those are separate from this category. Auto is gonna be a little bit different. So auto and home office are kind of their own animals to talk about. Um, good question supplies. So those are not office supplies. Those are are supplies that you need to do the work. So, um, again, maybe you are in a band and you need some guitar strings. That would be a supply wages. If you do have an employee and you’re paying them wages, you can write that off as a deduction, taxes and license. This one’s important. This one gets a little tricky, anything that’s a license, a business license. Um, anything like that is deductible, but taxes have to be business taxes to be deductible. So your personal tax payments, when you come and see me, and I tell you, you owe however much money with your return.
Marissa Danley (26:04):
Those are not deductions. Those are just your personal tax payments. They don’t go on your profit and loss. They don’t go on your bookkeeping and they don’t go on your tax return. So that one does get a little bit tricky, cuz you’re like, well I’m, self-employed, it should be a deduction, but it’s not. Those are your personal payments. Um, meals are also deductible if they’re business meals, which will also talk about utilities of the home. So maybe your cell phone, if you rent someplace outside of the home, um, internet, et cetera. And then also things like education and research. Those are definitely deductible.
Marissa Danley (26:43):
So home office let’s start there. So a lot of people working from home. So in that case, you have to have an exclusive, a space that’s exclusively and regularly used. So my oldest daughter just moved out and I took over her room and I’m so excited cuz now I have a much bigger office and I definitely use it regularly and exclusively. So it can’t be your kitchen table. It has to be a separate space. It can be a desk in a corner of a room, but it can’t be something that’s used for other things. Um, so what we do to get this deduction is the, we take a percentage and I’m gonna work through that with you in just a second. But I wanna throw these items into the home office category. There’s a couple things that go in the home office category and I wanna capture that. And then I’m gonna walk you through how we calculate it. So maybe you have mortgage interest, maybe you’re paying rents. Um, maybe you home insurance, renters insurance, maybe you’re paying property tax and utilities. So all those things get captured in the home office deduction, including repairs. So if you have some repairs that you paid for, we can throw those in there too. So here’s how this works. And bear with me. I know I’m throwing a lot at, let’s say that your room that you work in is a hundred square feet.
Marissa Danley (28:11):
You have a thousand square feet of total living space. So your apartment, your house, whatever is a thousand square feet. So a hundred of that is dedicated off of space. So 10% of your total living space is exclusively used for Ms. This. So let’s say that for the rent for the year, you paid 12,000 bucks for the whole year and you’ve paid 3000 in utilities. So for the year for your living space, you’ve paid $1,500, 15, I’m sorry, $15,000. That’s what you paid. You’ve used 10% of that for business. Remember we calculated 10% of your total living space is business. So that means that you get a $1,500 deduction. So that’s gonna go against your self-employment tax. So it’s a really, really good deduction to have and um, really good to have that exclusive space just for that re another deduction. That’s a little bit more involved is travel.
Marissa Danley (29:13):
People are starting to travel a little bit more again, which is great. Um, if you’re flying for business, we can write that off. If you’re paying for a hotel while you’re there. Great same thing with transportation cabs, Uber rides, et cetera, any fees that you might have, um, less fees, baggage fees, anything involved there and then meals while you’re traveling are also deductible. Now some days people say, well, I went for three nights for a conference, but then I say two nights for family. What can I deduct? Well, you can deduct the three nights you were there for the business, not the other two. So you kind of have to separate out what’s actually business versus personal.
Marissa Danley (29:58):
All right. I think that was Raven. Ask me the question about the repairs on the car. So let’s talk about auto and mileage here. This one gets complicated. We have to make some choices. We have to make some choices. We can either take what’s called a standard mileage allowance or a percentage of actual expenses. Okay? So we have to look at both and decide what’s better. Let’s say we choose the mileage allowance. So you’re keeping track of your driving. You’re keeping track from your first business stop of the day to the last business stop of the day. The IRS is gonna give you just a general allowance, 56 cents a mile for 2021. We add up all your miles. We tie Amazon by 56 cents. That’s your deduction. We also get to include parking here. So those are the two things that we include when it’s a standard mileage.
Marissa Danley (30:53):
Now stick with me here. Here’s the other choice actual. So this is what Raven was asking me about. We can potentially run off your, your insurance for your car gas, for your car interest on any car payments, repairs and maintenance and parking. So we get the, we get a choice between the two. Here’s the thing though, to write off any of it, you have to keep a mileage lock. So you have to track personal and business miles for both things, because if we are gonna take the standard mileage allowance, so 56 cents, we need to have your miles tracked. So we know what the number is, right? If we’re gonna take actual expenses, we have to, again, calculate a percentage. We have to look at how many miles versus how many miles were business and we’ll calculate a percentage. And then we’ll apply that percentage to the insurance, to the gas, to the interest, to all those things that I listed under those actual expenses.
Marissa Danley (31:58):
So it’s a little bit more involved when we do the actual, um, again, the business percentage apply to each of those items. I think I have a little example here. Maybe I don’t have an example. I have an example of something else in a second. Um, yeah. So just keep in mind, you know, in my experience the, my, the standard mileage allowance is actually most often better than keeping track of those actual expenses. So the key here as it does stay on my next slide is make sure you’re keeping your mileage log. And then when you’re doing your tax return, you can explore which of those work better. Um, you can’t estimate the IRS. Doesn’t like it when they, when you say, well, I think it was, you know, felt like about 20% of my driving was for business. Um, you know, sometimes it feels like 90% of my driving can be for business it’s they wanna see the hard numbers though. So they’re, they’re gonna want you to track the mileage no matter what I, um, one little tip on that mile IQ is a great app, um, to track things. So mile IQ is a good app. Um, what you’re gonna do is track from the first business top of the day to the last business, top of the day, everything else is commuting or personal. Let me give you a quick little example.
Marissa Danley (33:24):
Let’s say you have a home office, okay? Your home office is now your first stop of the day. You walk in there, you did your stop. You’ve got your first business stop of the day. You’re then gonna drive two miles to the supply store. You’re gonna buy some business stuff. You’re then gonna drive two more miles. And you’re gonna go to your client’s house. After that, you’re gonna drive four miles and you’re gonna pick your kids up at school. Then you’re gonna drive another three miles home. Okay? So this is your day. This is what you’ve done. Here’s your business mileage calculation for the day. You only get four miles. You only get four miles here because your first stop of the day was from the home office to the supply store. Your second stop and last stop of the day for business purposes was your client’s house because you drove to the kids’ school.
Marissa Danley (34:21):
You made it personal can’t count. Can’t count it anymore. Then you drive from the kids’ school to home. Doesn’t count anymore, cuz it’s not business on both ends. Now, if you’re gonna be have your superpower, your tax superpower, you’d drive from your client’s house to home before you went back to get the kids. Because now all of a sudden you can deduct first stop of the day. Second stop of the day and third stop of the day, which is nine miles. So if you have to go home, you might wanna think about doing some planning around this and how you organize your day and ends up being in different, a better deduction for you meals. Let’s go. Okay. So meals, um, have changed this year. It’s really exciting. They’re they’re, you know, we talked about the tax code, incentivizing things. So, uh, they decided, Hey, let’s incentivize people to go eat out so, and help the restaurants.
Marissa Danley (35:11):
So now meals are, let me give you the definit and I’ll tell you what’s really exciting. In a second, if you’re in town, you have to be meeting with another person for the purpose of discussing business, in order to write all that meal. It also has to be in a quiet location. They don’t want you any place loud, cuz you can’t be talking business if it’s loud. So that’s another technical thing it’s supposed to be quiet. Here’s the thing I’m excited about is previously we can only write up 50% of the expense, but because we’re incentivizing people to eat at restaurants, um, it’s now a hundred percent. So that’s really cool. I really, really like that. It helps support those small, hopefully small business restaurants, um, a hundred percent deduction travel meals are a little bit different. You don’t have to be with somebody else.
Marissa Danley (36:03):
You don’t have to be in a strange city and go talk to a stranger about your business in order to deduct the, uh, expense. You may also be able to take a per DM, which means kind of a standard allowance rather than the actual expense. If you have that question, want more information? Let me know later. Um, if that’s an option and again, this was limited to 50% before and we’re now at a hundred percent. Yay. Um, okay. Moving on to inventory, inventory and cost of good sold, which is cogs is per pretty involved. Um, basically what I’m gonna tell you is you have to have inventory. You have to have things that you sell in order, um, for this to actually be cogs. A lot of times people put things in there that isn’t really a cost of its sold. Um, so it’s, it’s pretty much involved for in inventory.
Marissa Danley (37:00):
Um, however, unless everything in and of itself is over 2,500 bucks each individual item. And if you’re making under 25 million a year, you don’t technically need to do inventory anymore. It was a little too burdensome on small businesses to have, have to do this inventory. So the IRS changed this a while ago. Um, if you, again, want more information about the specifics of inventory and you have it, please let me know. I’m happy to go over it with you. Um, depreciation is another very common tax deduction. People ask me what the heck. This is all the time I used to teach a 12 hour class on it. So if you don’t understand what I’m saying in the next three minutes, totally understandable. Um, depreciation is a cost matching system. So let me think about that for a second. Let’s think about that. So remember in the beginning I said that the real world is one thing and then tax land is different.
Marissa Danley (38:04):
So in the real world, we think of depreciation as something losing value. This is not true in tax land. It’s a cost recovery system. So what that means is we want to match the cost of the item to the use of the, if I buy something that’s gonna last five years, I am gonna wanna spread that out over the time I’m using it. I wanna get that deduction for the use of the item, right? So it’s gonna match the timeline of that item. So with that being said, we generally do this depreciation. If something costs more than 300 bucks and it will be used more than a year. So again, cost matching system. If it’s only used in one year, we’re matching it. We’re just gonna write it off. If it’s over time, we’re gonna depreciate depreciate it and match the use with the time. So lemme give you a quick example here. Let’s say you goodbye, a new computer.
Marissa Danley (39:08):
You spend 500 bucks on January 1st. There goes your Christmas money. All right. The IRS says that the computer will allow and the IRS has this giant long table of different items that we can DEP appreciate. And computer, they say, oh, that should last five years. Okay. So here’s the way it works. You’re not gonna split it up into five parts. You’re gonna split it up and take a different amount each year. So as you go through, the deduction is going to decrease. So you’re gonna start out high, go low, but you’re matching it over the years. So I know probably a little bit more than you wanted to know. Just keep in mind that this is something that this is a tax strategy. You might be able to buy some thing and spread the cost out. If you want to. Um, that being said, you don’t have to depreciate sort of, if you have a home office, we are going to depreciate the value of the home, the value of the home office.
Marissa Danley (40:16):
Over 39 years, we have, have to do that. If you own rental property, we have to depreciate the cost of the house over 27 and a half years long time. If it’s not those things, if it’s a computer, if it’s a table, if it’s a cow, you might want to write it off in one year. And this is a tax planning strategy might wanna write it all off. You might wanna appreciate it. If you have a high tax liability in one year, you might wanna write it all off. If you are just starting out or you have COVID hit and you didn’t make a whole lot of money, maybe you wanna spread that expense out and save some for later on. You can choose. You can choose.