10 Common Misconceptions About Tax Write-Offs

10 Common Misconceptions About Tax Write-Offs

10 Common Misconceptions About Tax Write-Offs 1000 667 Ryan Holloway

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.

In the eyes of the IRS, a single-person LLC and someone who’s independently freelancing are the same.

Itemizing deductions will always be higher than the standard deduction.

Especially for self-employed individuals, the standard deduction can sometimes be much more than itemized deductions. Although that can sound frustrating considering how much is spent on your business, the standard deduction is there to expedite the process for everyone. As such, it’s there for your benefit as well, regardless of how many write-offs you think you might be able to include.

Consultants and freelancers need an LLC to write off expenses.

In the eyes of the IRS, a single-person LLC and someone who’s independently freelancing are the same. Starting an LLC can be useful for opening up a business checking account (which can help organize expenses), as well as can protect from liability (for example, if someone was to have a reason to sue your LLC, they could only sue from that pot of income versus your entire net worth). Write-offs can be applied to personal checking accounts as well, especially if you’re just doing simple one-off work.

It requires full-time hours to qualify for self-employment write-offs.

While we often think of self-employment as a full-time job, it’s actually not the number of hours you put into the practice that defines self-employment.

As noted by the IRS, the determination of paying self-employment taxes is if you’ve made $400 or more from your skill or practice. Considering the offset you’d receive by writing off certain bills, this might be worth exploring if you’ve got a side-hustle that’s pulling in a little extra dough.

You can’t write-off self-employed items if you work a regular job, too.

As we stated above, the IRS’s threshold for self-employment tax is $400, which means you can apply write-offs after that. While for some it might not even be worth it itemizing everything out compared to the standard deduction in combination with their 9-5, write-offs are still applicable to side-hustles and passion projects too.

Charitable donations aren’t worth the receipts.

A charitable donation can almost always be worth exploring the receipt. Depending on your donation, some items appreciate in value, which can contribute to the tax savings you’d accrue (even if you didn’t initially spend money on the item). As it currently stands, the deduction is up to 50 percent of your AGI without regard to net operating carrybacks, as well as 30 percent for some organizations as well.

You can save less for quarterly taxes by using write-offs.

It’s never recommended to try and deduct tax savings from write-offs for quarterly taxes ‘on-the-go’. Unless you have a large carryback that will always counterbalance your quarterly tax obligation anyway, having a pocket of savings for quarterlies that reflects the current tax rate is crucial. You can always pay yourself back what you didn’t end up spending, but trying to play catchup from what you estimated as write-offs from quarterlies can be a huge headache if you’re not careful.

Write-offs signify that it’s fine to go cash broke.

People often assume that because they’re spending money on their business that can be written off, it’s always smart spending. This contributes to a lot of businesses becoming ‘cash broke’, where they have all their money tied up in expenses. Real estate is often an industry where this mistake can occur, as a developer will have all their cash tied into properties, and while that can be great for tax season, it doesn’t help with moving capital right now (including to pay yourself). Instead, have a fund for a rainy day, and don’t get too ambitious on write-offs, using them more as a tool of necessity and opportunity than a line of reducing liability or expanding ‘credit’.

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