Being self-employed is a great opportunity to define income and your schedule on your own terms. Tax deductions also draw many to the model of employment.
Office space, mileage, supplies, even telecommunications are just the tip of the iceberg when it comes to tax deductions.
However, below are eight items which should never be included on your tax return; unless an audit is something you enjoy.
1. Expensive Business Gifts
25 dollars is pretty much the monetary limit of what you can give to customers, vendors, and business contacts throughout the tax year. Remember to maintain meticulous gifting details. In instances where gifts exceed $25 in value, only deduct the first $25 of the gift on your taxes.
2. Personal Expenses
This is a dangerous category. The IRS has a category classified as “listed property.” This means that the items within that classification fall under both business and personal use. If you do attempt to write off these types of items, make sure that these items are predominant use. Meaning that the item is used more 50% of the time for business purposes.
3. Political Contributions
Charitable organizations which are 501(c) (3) are tax exempt. Donations to these organizations are tax deductible because they are designed to serve noble and non-private causes. These organizations are also forbidden from influencing legislation. A good tax deduction question to ask yourself is “does organization ever attempts to alter the course of legislation for political cause?”
4. Capital Expenses
Trying to deduct things like real estate from your business? Think again because these things are considered as assets. Business start-up costs, assets, and improvements are not deductible. These items are capitalized over several years due to their large upfront costs. For example, an eighty-thousand-dollar machine in one year could significantly impact the profit of your company and therefore not be included as one lump sum.
5. Costs of Goods Sold
Selling a finished product? You can not deduct the raw materials, storage, and labor included in the process of making the finished product. Deducting cost of goods sold and business expenses is the same as double dipping, which is forbidden by the IRS.
6. Standard Community Costs
This is something which I must constantly remind business owners. Everyone needs to get to and from work which makes that round-trip non-tax deductible. However, getting to a workplace from another (home office included) is allowable. Just make sure that you are also keeping meticulous mileage records in the case of an audit.
7. Penalties and Fines
Get a traffic ticket on your way to a meeting? Not a business expense because you broke the law. This also applies to penalties and fines assessed by the IRS.
8. Clothing which doubles as Personal Wear
This is a hard one to also discern. I always ask my clients to ask themselves this question. Does your job require a uniform, safety equipment, or apparel? If so and you don’t wear it outside of work, then the tax write-off is a go.
There are perks to being part of the small business revolution. Just don’t try to cheat the IRS. Hopefully these 8 topics have given you some guidance as what to include on your tax write-offs.