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As tax season approaches each year, many people wonder what truly qualifies for small business tax deductions. The honest answer given by most accountants is "anything." This is largely true. As a business owner, you can write off just about any expense you incur. The factor to consider, though, is whether your deduction will withstand an audit. To protect yourself, be very cautious about these four expenses.
#1 Business Dinners
When you take a client out to dinner, are you really talking business? You have to answer this question during an audit. What business was addressed, and why was it necessary to meet for dinner instead of in the office? In some scenarios, you can justify the expense. Your client may be in from out of town, and you may have even signed a contract right there at the dinner table. If you are not actually going to be talking about business, though, avoid deducting this expense. Too many business dinners and outings can be a red flag to an auditor.
#2 Rent or Mortgage
You may have a home office, and you can legitimately deduct part of your rent, mortgage or home insurance from your small business filing if this is the case. The tricky part comes in deciding what portion to deduct. You have to decide which part of your home is used for business purposes explicitly. Is your office in a second bedroom that also serves as a media room or guest room? If so, this can be an improper deduction. Does your office computer also house a video game system for your children? While you can deduct a percentage of your rent in keeping with the percentage of your home used for business purposes only, this is a hard thing to deduct because so few people actually have a space that is never used for recreation.
#3 Car Insurance
You can deduct mileage from your small business taxes if you use your car for business purposes. It is easy to document when you are driving for a business trip, and this deduction is not controversial. You can also deduct a portion of your car insurance. This rule is the same as the rule for deducting rent or mortgage. You have to determine the percentage of your car used for business purposes only. Proving this can be tricky at the time of audit, and you will have to document every single time you use your car to show the exact percentage that applied exclusively to business.
#4 Travel Expenses
Business travel deductions are standard and entirely within the law. However, there are some situations when the amount earned off the travel does not justify the expense. For example, a writer may be permitted to take a trip, write a review, and deduct the trip expense. But, if at the end of the year, the writer has earned less off of writing trip reviews than he has spent traveling, he is not actually running a business; he is engaging in a hobby. This is against tax law.
