Written by Luke Frye

Tax season can feel like a slog to creatives and entrepreneurs. who aren’t numerically inclined. But with some patience you can learn how to be savvy about taxes, including what you need to know to make sure you’re not missing any write-offs that can save you money. 

Let’s look at a run-down of the details on write-offs, also called deductions, so you can head into tax season with confidence. 

What is a write-off? What is a tax deduction?

In a general sense, a write-off is a reduction. In regards to income tax filings, write-offs are reductions in your taxable income to account for expenses that were necessary to produce that income.

For example, a baker will be taxed on the income they generate from bread sales. But the cost of a loaf includes not only her effort but also flour and yeast. Being taxed on the loaf’s entire cost would mean they were being taxed not only on efforts but also on the money spent on the supplies that made that effort possible. 

To make things fairer, you are allowed to write off many business expenses, which are defined by the IRS as “the cost of carrying on a trade or business.”

What business expenses can I write off? 

The first rule governing what you can and can’t write-off from your taxable income is that a deductible business expense has to be both ordinary and necessary. 

An ordinary expense is anything that is run-of-the-mill in your industry. A necessary expense is one that contributes to your business—something “helpful and appropriate.” But necessary is not the same as indispensable; you may be able to do without a necessary expense, but expending it helps your business run more effectively.

An expense that is deductible for one business may not be deductible for others. For example, if a petting-zoo entrepreneur spends money on a pet iguana to use in his business, he can deduct the costs of the creature and its care. For him, buying an iguana is both ordinary and necessary. But if a self-employed bookkeeper bought a pet iguana to liven up her home office, she could not deduct the cost. The iguana is neither an ordinary nor necessary expense for a bookkeeping business.

One rule of thumb is that if a purchase is of a personal nature, such as a pet for your home office or most clothing you wear to work, assume that it is not deductible. Food can be deductible in some cases; you can deduct 50 percent of a meal when it is purchased for a specific business purpose, such as a working lunch. You can deduct expenses that are paid for with personal funds, but it is generally best to use a business account separately for anything needed with the business. Just because you forgot your business card one day for an office supply run does not mean you don’t get that deduction. Just be sure to work with your bookkeeper to track it properly.

Possible Deductions for Taxes

Here's a pretty standard list of deductions for business owners:

Capital Expenses

• Depreciation

• Costs of Goods and Services

• Startup and Organizational Costs

Self-Employed Expenses

• Health Insurance Premiums

• Moving Expenses

• Retirement Plans

• Self-Employment Taxes

• Student Loan Interest

Standard Business Expenses

• Advertising

• Bad Debt

• Bank Fees

• Car and Truck Expenses

• Charitable Donations

• Conventions and Trade Shows

• Education

• Insurance

• Intangibles

• Interest

• Home Office Deductions

• Legal, Accounting and Professional Fees

• Maintenance, Repairs, and Renovations

• Meals and Entertainment

• Non-Cash Gifts and Rewards

• Office Supplies, Tools and Services

• Qualified Business Income

• Rent and Property Leases

• Research and Development (R&D)

• Salaries and Wages

• Utilities

• Taxes

• Business Travel

• Software

This list doesn't include everything you can deduct. Remember, it depends on your industry. And some expenses might not be entirely deductible.

What happens if my tax deductions are incorrect?

Try to be as accurate as possible in identifying your write-offs. A habit of reporting incorrect numbers may lead to an audit. And note that you may get in hot water during an audit if you don’t have receipts for your expenses. 

If you are found to have incorrectly claimed deductions, you may owe additional tax and even charged penalties and fines with interest. If your incorrect reporting is found to be fraudulent, then you could face criminal liability. 

The assistance of a qualified bookkeeper and/or CPA can help you get this right the first time. Feel free to reach out to Timber Tax if you have any questions.

Luke Frye is a Washington CPA and co-founder of Timber Tax, tax advisors for entrepreneurs. You can book a call to talk with Timber here.