Tax write-offs are tricky business.
While an excellent tool for budding entrepreneurs and self-employed individuals, they also can be one of the fastest ways to get audited by the IRS.
Although they aren’t necessarily out to question the extra cream cheese you got at a business lunch, people try to skim on their taxes all the time by using write-offs.
As common knowledge, many of us become fearful that if we use write-offs, we’ll face a wall of scrutiny. However, that’s why we’re going to outline ten of the most common misconceptions we hear about write-offs, as well as what’s really the truth behind them. Check it out:
Everything semi-related to the business can be written off.
Often when people first become self-employed or entrepreneurs, they’ll rant and rave about how nearly everything surrounding their business can be written off. Unfortunately, they’ll also quickly learn that there are indeed some limitations the IRS has laid out for what can and can’t be written off. While that’s not to say there aren’t some generous portions to help businesses stay on their feet, the guidelines are definitely crafted with meticulous detail.
One popular example of how stringent write-offs are is with clothing. Special clothes such as a uniform can be written off, however, a rockstar having a custom jacket made for a TV appearance cannot. Why is that the case? The defining rule by the IRS is that the clothing item can’t qualify as ‘everyday wear’, which although disappointing, makes sense given that people could get carried away with their personal spending, as well as in potentially trying to add revenue streams from clothes. Other items, however, make the list of write-offs easily, such as cellphones, portions of rent, and even business meals, which help quite a bit with networking.
Every receipt needs to be kept and itemized.
While it’s great to have a paper trail, that’s not always going to make a huge difference in the eyes of the IRS. As a bank statement can most likely cover a lot of the expenses you’re looking to write-off, the bigger concern is how reasonable are your expenses per your occupation. For example, someone who makes props for a living might write-off a lot of materials versus a graphic designer; and while they work in similar fields, it really boils down to the individual purchases at hand. Keep receipts as much as possible, but don’t sweat it if you forget a coffee or two.
Writing off business meals and entertainment is tricky.
People are often afraid they’ll abuse the meal and entertainment deduction, where they can lose quite a bit in potential write-offs. Obviously, you and a coworker going to grab a couple of beers after work can’t always be considered a work session, however, the 2017 Tax Cuts and Job Act balanced out meals and entertainment deductions to work for all different types of businesses.
Luckily, the good folks over at Bench put together this helpful chart to breakdown the types of deductions:
- Entertaining clients (I.E.: Golf, concerts, etc) is 0% deductible
- Business meals with a client are 50% deductible
- Office snacks and meals are 50% deductible
- Company-wide parties are 100% deductible
- Meals and entertainment provided as compensation are 100% deductible
As you can see, the breakdown is a little more simple than most would anticipate, and as long as you’re paying attention to receipts and tallying totals, this will be a cinch to include at your end of year returns.