There is a lot of mis-information out there around what's deductible and what's not. Here are a few common myths that we want to set the record straight on.
Myth #1: Claiming the home office deduction will raise a flag with the IRS
Sometimes you'll see people say, you don't want to take that deduction because it could flag you for something later on to be clear. The IRS is looking for fraud. You are entitled to valid deductions. For example, you use your home office regularly and exclusively. If you are appropriately allocating the right percentage to things like internet and utilities and other expenses that you might have for your home or apartment, take that deduction. Don't lose out on that because there's a myth that the IRS may come back looking for you. As long as you can support your deduction, you should be good to go. Make sure to provide all of the information that you have to your tax preparer and allow them to enter it properly into your return so that you can lower your tax burden.
Myth #2: If you lose money for enough years, the IRS will classify you as a hobby.
That's not necessarily true. Now, the reason that you don't want to be classified as a hobby is because you cannot just deduct all of the expenses. Whereas in a business, if you spend more money than you make, you can take a loss on that business. You're not allowed to do that with a hobby. What you really want to show is one, you are in the business of making money. The fact that you're not profitable doesn't mean that you're not trying to get paid. You could show that by having a website, showing proposals that backup for meetings that you've had or clients that you've tried to land. If the IRS comes back because you've had losses for year over year over year, your goal is to show them that this is not a hobby. That requires that you have some kind of business plan, you've got an EIN and bank account, showing that this is a real business.
Food and Travel: What Counts as a Deduction?
It seems that there is a common misconception that if you have a meal with someone and you mentioned work, it is automatically a deductible. Now the IRS doesn't know what you talked about at a meeting, but it's your intent that helps you to not get audited. Do you have calendar invites for people that you're meeting with and how that relates to business? Remember the meal is deductible if you're meeting with somebody for your business, somebody that you work with, or a lead that you're trying to land a client. Something related to your business needs to be the reason why you were having the meal in the first place.
Don't automatically assume that you go to brunch with your friend and you say your business name. And so that makes it a deductible expense. That's not true. And if you are taking a bunch of meal expenses as a percentage of the rest of your expenses, you could cause a flag that the IRS is going to want to look into to see why you're eating out.
That leads me to a common misconception about travel expenses. If you go on travel for business, it is true that those expenses are going to be deductible to you. Let's say that there is a tax conference in Hawaii. Lucky me, I get to fly to Hawaii and deduct that expense, deduct my cost of lodging, deduct the cost of the conference, all of that, but the whole trip isn't deductible, if I extend it for personal reasons. If the conference is three days and I decided to stay for two weeks, only a percentage of what you have spent to go to that conference is deductible only the business portion. So again, don't get caught up in this idea that if you go for business, everything that you do while you're there as a deductible expense, you're going to want to submit that to your tax preparer or your account. Make sure that you verify what you were there for, for how long was it for business and what you spent on and only deduct the appropriate amount.
Clothing and Accessories
This can be a hard one, especially if you're an influencer or someone who does blogging or vlogging for which this is a hefty potential part of your expenses. Unfortunately, the IRS hasn't really caught up with clothing and accessories as a business expense. What they generally say is if you could wear it for something else, this is not going to be a deduction to you. What they're looking to deduct ,in terms of clothes and accessories are things that are branded that have a patch or logo, making it very clear that this is for my business.
This is advertising my business or something that is specifically related to your trade. So if your handyman, he had to buy a tool belt or coveralls for a mechanic or a chef's coat. All of those things would be deductible as ordinary and necessary for your business.
Now, what I will say is I, and some of my colleagues have experienced with influencer deductions. We can look at your expenses to see what are the items that you had to purchase, because they were part of a partnership agreement or that they were required as part of your contract versus the things that you bought on your own. And even if you bought them on your own. Do you have a blog or a vlog that shows why you purchased this item? You really want to be specific about that and have support documentation and having an accountant or tax preparer on your side is going to make that much easier to be able to.
Business Loans and Credit Card Payments
In business loans, especially things like cars, you see some people talking online about if you buy a car in your business name, that's an automatic deduction. That's not true. If you buy a car in your business's name, but you never drive it for business because you work from home and you don't have any miles that are for business for it, truth be told that's not a deductible expense.
Keep that in mind, just because you buy something in the business's name or put something on the business. Doesn't automatically make it a deductible expense.
On the flip side, just because you pay for credit card expenses with business funds, you need to say what that was paid for. The items that were paid for on the credit card must also be deductible expenses. You don't want to double count expenses and you don't want to deduct those things that are not legal for you to do so. If the IRS comes back and reviews or audits you, you'll need to show support for why you called those deductible expenses. You could be responsible for penalties and interest as well as the taxes that were owed on that amount in the first.
The main rule around deductible expenses is that they are ordinary and necessary. Ordinary means that they are typical in your industry, other peers or people that do the same thing that you do are incurring the same types of expenses and necessary, mean that they are helpful for you to do your work. If you ever are in a gray area of whether or not this is a deductible expense, you want to make sure that you have all of the paperwork support and backup documentation, so that if you're asked about it down the line, whether by your accountant or tax preparer or by the IRS, if they send you a letter, you've already got support for what's going on.