How to Write Off Small Business Expenses

As a small business owner, you usually have to spend money to make money. The bright side ? You can deduct qualifying business expenses from your taxes to reduce your overall tax payable. But how does radiation work? Here’s what you need to know.

Writing off small business expenses starts with tracking them throughout the year. You can streamline the tracking process by separating your business and personal expenses. For example, most business owners open a dedicated business bank account or business credit card and use it exclusively for business purchases.

As for receipts, the IRS can audit you and ask to see proof of all your business expenses, so you should record them as you go. “One way to organize receipts is to keep a folder for each of your vendors with all of the receipts for that year. Another option is to attach electronic copies of your receipts to transactions in your accounting software,” says Tim Yoder, CPA.

At tax time, you will report the amounts you spent on various expense categories on your tax return. Any eligible expense that does not fit into a listed category can be added in the “other” section. Then you subtract all of your expenses from your gross income, reducing the amount subject to tax.

For a business expense to be deductible, it must be ordinary, necessary and common in your line of business. For example, the IRS lists the following expense categories on its Schedule C form:

While the above types of expenses can usually be waived, here’s an overview of what can’t:

“When in doubt, do your research or ask a CPA.” says Moira Corcoran, CPA. “Even though an expense may be ordinary and necessary, you might not be allowed to deduct it in the year you paid for it, or at all. Taking deductions you shouldn’t is a potential invitation to a audit.”

When you file tax returns for your business, how you report business expenses will depend on your business structure.

Sole proprietors report their business income using Schedule C (Form 1040). The majority of business expenses are added to Part II on lines 8 to 30. Expenses that do not fall into any of the expense categories listed in Part II can be entered in Part V.

Partnerships are required to file Form 1065. Business expenses are claimed in the “Deduction” section on lines 9 through 21.

Both C and S corporations are required to complete Form 1120. Expenses are claimed in the “Deductions” section on lines 12 through 29c.

The form required for an LLC will depend on the business structure it chooses. LLCs can be treated as corporations, partnerships, or disregarded entities.

You can often deduct 100% of eligible ordinary and necessary business expenses. However, according to Lei Han, CPA, “It is important to be aware of the limitations of certain types of deductions. For example, meal expenses provided by restaurants for business purposes can be deducted 100% in 2021 and 2022 (due to the Consolidated Appropriations Act), but the normal limit is 50%. Also, you can only deduct up to $25 in business gifts per person per year.

When you use the cash method, you deduct expenses from the tax year in which you paid them. For example, you will report expenses that were paid in 2022 when you file your 2022 tax return.

On the other hand, if you use the accrual method, you deduct expenses when you become responsible for them. For example, if you hired a web designer and he completed the work in December 2022, but you didn’t pay him until January 2023, you deduct the expenses for the 2022 tax year. .