One of my bookkeeping clients recently asked if she could categorize her haircut as a marketing expense because she discussed business with her hairstylist. Sigh… NOPE! Unfortunately, that’s not how it works! If you want to stay on the IRS’s good side, here are some essential tax tips to keep in mind.
Tax Code 101: A Guide to Legal Deductions
The tax code is like a rule book. Just as driving laws keep us safe on the road, tax laws keep our finances in order, allowing for deductions that reduce tax liabilities legally. It’s all about knowing which expenses truly qualify.
W2 vs. Business Owners: What Deductions Are Available?
W2 employees—those who work standard jobs without a business on the side—have limited write-offs. However, owning a business opens up thousands of potential deductions, even for side hustles! You don’t need to quit your day job to take advantage of these benefits. Just having a business or side business qualifies you to explore a vast range of deductions.
What Not to Do with Tax Write-Offs
Some expenses can never be considered business deductions, no matter the circumstances. These include:
- Writing off personal purchases as business expenses. Just because a conversation turns to business doesn’t mean it’s deductible.
- Claiming credits you don’t qualify for. Only take credits that apply to your specific situation.
- Not reporting all income. Underreporting income is a red flag for audits.
- Misrepresenting your income. Income should always reflect reality.
- Claiming pets as dependents. As much as we love them, pets don’t qualify as dependents!
Proving Your Business to the IRS
The IRS requires business deductions to be tied to “the pursuit of income.” If you’re earning or actively trying to earn, even from a small side business, you’re typically eligible for deductions. However, if it appears more like a hobby than an income-driven activity, the IRS may challenge your deductions. Make sure you have clear business intentions to qualify.
The tax code is full of legitimate deductions for business owners. Use them wisely to minimize taxes while staying compliant with IRS guidelines!
