You’ve heard the adage that two can live as cheaply as one. When you have a business, you can live even more cheaply than that, right? Well…that’s only partly true. One of the major joys of having a business that enables you to live more cheaply is that you can write off so many things for the business.
Valid write-offs can enable your business to support your lifestyle, but you can’t make them without a little work. To get away with all those luscious write-offs, here’s what you must do.
1. Keep Records
Keep really good records of all your expenditures. This means “everything,” whether you think the expense applies to your business or not. Who knows? When you sit down with your tax professional, she or he may find a legal way for you to claim that expense as a write-off. But without those receipts, even the courts can’t help you when the IRS denies your deductions.
Incidentally, simply having a charge appear on a credit card statement is not enough. You need to keep the actual receipt that shows what you bought. An example I like to use is this:
Your Visa card statement shows a $125 charge to Office Depot. You would expect the IRS to automatically approve that as a business expense, right? Nope. At Office Depot, you can buy colorful stationary to print out birthday party invitations for your six-year-old daughter, toilet paper, coffee supplies, children’s games and lots of other non-business goodies. Without the receipt, the IRS has no way of knowing your $125 charge had anything to do with business.
In fact, another tax pro asked for my help with an audit when she got a printout from Costco for her client’s $50,000 worth of deductions/purchases. It turns out that they were all personal!
2. Keep Records
Did I already say that? Yup. This time, keep records that reflect your mileage.
On January 1, write down your odometer reading on all the vehicles you will be using for business in the coming year. Each time you drive anywhere for business, make a note of which car you’re using, where you’re going—including address and distance—as well as the business purpose of the trip. If you don’t, you might be audited by the IRS, which is cracking down on vehicle deductions for taxpayers who have no records.
You have more than one good option for logging mileage. Take a look at the TripLog app, which not only helps you track the usage of multiple cars, but you can also integrate it with QuickBooks. If you’re a freelancer, QuickBooks Self-Employed offers similar functionality. By the way, people who keep records often find that their business mileage is much higher than they thought.
3. Keep Records
I acknowledge that this is really getting tedious. This time, you need to keep records of key business decisions—and the motivations behind them.
Whether your business is incorporated or not, keep some form of minutes each month, describing the decisions you make in your business. It’s sort of like making mini-business plans each month. This will help you prove why something is a genuine business deduction, even if it looks like a personal one.
For example, keep documentation that reflects the reasons your business needs to buy a car, a computer or other business equipment. Make sure you write down why. You can also apply this to discussing the launch of expenditures related to releasing a new product or launching a new marketing initiative. If you end up with losses, thorough and dated documentation can prove you really did have a business motive for your decisions.
4. Watch Your Timing
Generally, you may only take a write-off after you have started your business, your new division or your new project. During the startup phase, practically nothing is deductible for that startup. So if you created a business in 2015 but made your first sale in 2016, you probably can’t write off your 2015 business expenses, only those from 2016. This is powerful information. Read the IRS rules here, and talk to a tax expert to gain further understanding.
Knowing this, you can ensure that you have at least a few sales during December of your first year, so you can start writing off some of your initial expenditures. People who don’t know this go blithely along and spend thousands of dollars in their first year setting things up—but don’t open their doors until the following year. Big mistake.
5. Do Your Homework or Consult a Tax Professional
Sometimes you are under the impression that something can be written off because you’ve been talking to other business owners, reading articles or just hearing rumors. That information may actually be true. Or, an even more important distinction, that information may have been true at one time.
That being said, practically all of the best write-offs have conditions. Many special bonus write-offs expire at the whim of congress. Other deductions can bite you in the butt. For instance, when you use Section 179 depreciation, you must pay it back if you don’t use the asset long enough.
6. Think of All This as a Game
Better yet, think of all this as a video game, since you can track so many things with apps and online tools. It’s you against the IRS. The one with the best records wins!
Whether you call it a write-off or deduction, reducing your taxable income is something you should be mindful of throughout the year. Hold on to receipts, keep extensive records and talk to your accounting professional about what constitutes a valid deduction for your business. Who knows? Today’s write-offs might lead to tomorrow’s business growth and your continued success.