As a Millennial, chances are you have a side hustle that brings in some extra money. As much of a bummer as it may be, this income needs to be reported on your tax return.
The good news is you’re a small business owner which means you can take tax deductions to lower the amount of tax you owe!
However, new business owners and side hustlers may not know which expenses are business expenses and which are personal expenses. There’s a fine line between them, after all.
As a business owner and a CPA, I can tell you even managing both my personal and business finances can get a bit…complex.
Read more: How To Separate Your Personal and Business Finances (And Why You Need To)
1. Internet bill
Businesses often have dedicated internet lines that only the business uses. These lines are standard and ordinary business expenses, as you’d expect.
Your internet at home may also be deductible if you use it at least partially for business. If you have a dedicated business internet line for your home that you don’t use personally, that’d be fully deductible.
However, you likely split your home internet use between your business and personal use. In this case, divide your internet time usage between personal use and business use. Then, calculate the percentage used for business use and apply that percentage to your internet bill to get the deductible amount.
2. Cell phone bill
Cell phone bills work much like internet bills. Some businesses have dedicated cell phones that are only used for business. In this case, they’d be 100% deductible.
If you only have one cell phone line you use for business and personal use, divide the usage between personal and business use. Then, apply the business use percentage to your bill to get the deductible amount.
You can use your cell phone bill to back this up for minutes talked and texts used, but dividing data usage is trickier.
3. Health insurance premiums
Health insurance premiums may be deductible depending on your circumstances. If you offer health insurance as an employee benefit to your employees, it’s definitely deductible as long as it qualifies as an employee benefit program.
Some small business owners may not know that health insurance premiums are deductible by self-employed individuals. You could qualify to deduct your health insurance premiums if neither you nor your spouse is eligible for an employer-subsidized health insurance plan.
The deduction has plenty of limitations you’ll need to follow. For instance, the deduction can’t exceed your earned income from your business. That said, you should look into this deduction if you pay for your own health insurance premiums since health insurance is not cheap and this could lead to a substantial deduction.
4. Car expenses or mileage
The easiest way to deduct car expenses is by expensing the entire cost of the vehicle’s operation, but you can only do that if you use the car 100% for business.
People who use a vehicle for personal and business use can still deduct vehicle expenses, though.
You can use one of two methods depending on your wishes.
- The easy method is keeping a detailed mileage log of your business use and applying a standard mileage rate to those miles. The mileage log must detail every business trip you take. It has to have the date, where you went, the purpose of the trip, the starting and ending mileage reading of your car for the trip, and the miles you drove.
- The other method is a bit more complex, but may make sense if you have detailed records. You can claim the actual expenses of operating the car when you use it for business use. Of course, you have to keep receipts for all of these expenses.
Once you have the total expenses for operating your car over the year, you divide the expenses between personal and business use.
5. Work travel
Work travel may be deductible, but only as ordinary and necessary expenses. The IRS disallows lavish and personal travel as a business expense.
Travel expenses qualify if you have to be away from your principal place of business for longer than an ordinary day’s work. These expenses can include airfare, Uber or Lyft rides, lodging, and other ordinary and necessary business expenses you incur while traveling.
You may be able to deduct the cost to travel to and from a destination even if you add a couple of personal days to the trip. The key is the travel must be primarily business-related, and you can only deduct business-related, not personal, expenses.
For example, you can go to a business conference on Thursday Friday and you can deduct the full cost of your travel expenses (i.e. flights, hotel stays, etc.) since you need to pay for these things in order to attend the conference. If you also decide to stay on Saturday and Sunday, those days are not deductible since you’re staying just for fun and not to attend the conference.
6. Business meals
You may have heard you can expense dining out as a business expense. This is partially true.
You can’t expense every meal your family eats out as a business expense. Instead, you can only deduct actual business meals.
Until Jan. 31, 2023, you can deduct 100% of your business meals, after that date, the typical 50% deduction will return. The 100% deduction was introduced to help struggling restaurants during the COVID-19 pandemic, and to encourage those traveling for business to still support local eateries.
So what exactly qualifies as a business meal?
The meal’s primary purpose has to be related to you conducting your business. If you can prove a business purpose for the meal, it should qualify. For instance, when you travel on business, you have to eat. For this reason, business travel-related meals should be eligible.
But what costs qualify? Some include:
- Cost of food and beverages.
- Sales tax.
- Delivery fees.
You can’t deduct the cost of meals for spouses or kids unless those costs would be otherwise deductible as a business cost (aka, they’re one of your employees).
Consult your tax preparation software or tax expert to determine which category your meal expenses fall into, as with many deductions, the rules can be tricky.
Education is a legitimate business expense if the education helps your business in some way. As a CPA, I could easily expense classes that help me gain knowledge about taxes. As a freelance writer, I could expense a creative writing class.
Even online courses can be expensed, too. As a blogger, I could take a course on search engine optimization and classify it as a business expense. The key is making sure the education helps your business in some way.
Read more: Got Freelance Income? 7 Money-Saving Tax Tips
8. Home office expense
Expensing a home office is a legitimate business expense, but only if you carefully follow the rules. This expense is available to both homeowners and renters. For a home office to qualify as an expense, it must meet two tests:
- The home office must be a space regularly and exclusively used for your business. If you use that space for anything other than business, it doesn’t qualify. That means your office that doubles as a guest room doesn’t qualify. Thankfully, you can deduct part of a room. So, if your guest room office is clearly separated, you can deduct the square footage used solely for business purposes.
- Your home must be your business’s principal place of business. That means it must be used substantially and regularly to conduct business.
You can claim the home office deduction in two ways. The stress-free way requires you to multiply the square footage of your office by a specific dollar rate per foot specified by the IRS.
The other way is allocating your home expenses by the percentage of space your home office takes of the entire home. This could result in a more significant deduction but requires a lot of calculation.
9. Office supplies
When you work at home, it’s easy to mix business and personal items. One category of items many people don’t think to deduct is the office supplies they use regularly.
The office supplies must be used by the business to qualify. Even so, there’s a long list of items that may qualify:
- Printer paper.
- Bubble wrap.
Depending on your business, this could result in a significant deduction.
Subscriptions can be legitimate business expenses you can deduct. As a freelance writer, I subscribe to Grammarly to help me catch typos before I turn articles in. This is a legitimate business expense as long as I use it solely for business purposes.
Other examples could include photographers deducting subscriptions for photo editing software and a business paying for their accounting software subscription.
Software subscriptions aren’t the only subscriptions that qualify. If your business subscribes to a newspaper or magazine, it may be eligible if it is used for business purposes.
A quick warning about deductions
Before you take the info and run with it, I wanted to share a bit of a warning. Some experts recommend you aggressively write off anything you spend money on and find a way to justify it as a business expense. I don’t fall into that camp.
You should only be expensing legitimate business expenses through your business. If they’re legitimate, there is no issue. However, if you stretch the truth, you risk failing an audit and having to pay penalties and interest.
So what is a legitimate business expense?
The IRS states:
“Business expenses are the cost of carrying on a trade or business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
There’s no way you can be expected to understand all the ins and outs of the tax code as an individual. If you’re unsure if you’re classifying personal and business expenses correctly, I highly recommend consulting an expert.
Read more: Should You Hire A Tax Preparer?
As a business owner, you should generally take all of the deductions you possibly can. Each dollar of deduction lowers your taxable income by a dollar, lowering the tax you pay. When you pay less in taxes, you have more money to spend on your family, invest in assets, or reinvest in your business.
Be careful when deciding what qualifies as a personal or business deduction, though. You want to make sure you follow the IRS’s guidelines so you can back up your claims should you get audited.
If you do get audited and the IRS disallows some of your deductions, you’ll have to pay the tax owed and potentially interest and penalties, as well. Consult an expert if you need help making these decisions.