It’s the beginning of a new year, and for a lot of people, it’s also the beginning of a new business venture. Get off to a great start by finding all the deductions available to you!
The IRS defines a business deduction as the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Ordinary expenses are things that are normal, common, and accepted under the circumstances by the business community, and necessary expenses are those that are helpful and appropriate.
That’s a wide door, and purposefully so. With some imagination, documentation and careful planning the deduction possibilities are almost endless.
Hidden business deductions as those things you’re already spending money on, which could be reclassified as business deductions. By reclassifying these items, you shift the money to pay for them from after-tax dollars to pre-tax dollars. And every pre-tax dollar you spend on business expenses reduces your taxable income, and thus your tax payable.
I spent an entire chapter in my book, Tax Loopholes for eBay Sellers on finding these deductions, along with examples of each. Below is an abbreviated list of things you might be spending money on, but not writing off. And best of all, these deductions aren’t limited to just eBay businesses! Any kind of business can benefit from finding and taking these deductions:
Learning Activities. Learning how a business operates, basic bookkeeping and recordkeeping, etc., are all necessary to operating your business – which means the expenses associated with learning are also deductible. But the key to making this deduction category work is to have your business going FIRST. If you’re selling on eBay and you’ve already got items listed, that’s good. If you’ve sold something, that’s even better! As soon as you have a business, the government will subsidize your education by letting your take a deduction for just about anything that makes you smarter.
Start-Up Activities. This is one of the big deduction areas people miss, usually because you’re typically spending your own money, and your business hasn’t been formed yet. Unlike learning activities, start-up activities are deductible. That can include the costs to get your business formed, bookkeeping costs to get your record system created, equipment and software costs, furniture, fixtures to store inventory on – and a huge list of others. One of the big things people miss in this area is the costs to ready items for sale. If you sell used merchandise, for example, and have to do cleaning or reconditioning before sale, those are deductible, as well as power cords to test electronics, repair costs, and so on.
Business Activities. These day-to-day activities include driving to the office supply store, post office, and around town on business (even if you do some personal errands along the way); the Internet connection fee and coffee you buy when sitting somewhere cataloging and listing items; the lunch you grab on the run because you’re looking for merchandise and more. All of your costs associated with these activities are deductible, including the mileage you’re putting on your vehicle making all of these short and long trips.
Bad Debts. Every seller has a story about getting burned by a con artist buyer. The expenses you incur in connection with those rogue transactions, including the cost of the item itself, are all deductible as bad debt expenses. You have to record the income first, though, in order to show the IRS that you reported the income you didn’t collect.
Automobile Expenses. The IRS allows you to take a deduction for automobile operating expenses when a vehicle is being used for business purposes. This deduction applies to new and used vehicles, whether owned by you personally or by your business.
You can deduct auto expenses in two ways: via actual expenses or via a mileage allowance. With actual expenses, you need to track things like gas and oil, tires, repairs, license/registration fees, loan/lease payments, insurance, depreciation, etc., and then take a percentage of the total, based on your personal to business use ratio.
The second alternative is to track your business-related mileage and take a straight deduction of that amount. This year the reimbursable business mileage rate is 50.5 cents per mile – up 10 cents per mile since 2005! Keep a small notebook in your vehicle so you can easily track your mileage when beginning and ending your trips.