Taking tax deductions on business expenses is one of the advantages of being self-employed. As a savvy business owner, you need to know which purchases qualify and which don't.
Step 1: Look at Schedule C Keep a copy of the IRS Schedule C form and its instructions handy so you can consult it as needed. If there's a place to report an expense on the Schedule C, it's probably deductible.
TIP: Keep all of your business purchase receipts to give to your tax preparer, even when in doubt about their deductible status, and keep copies for your personal records.
Step 2: Designate home office space Keep your home office separate from your personal living space if you run your business exclusively from home. You can take a deduction for the square footage of your home that is dedicated to business operations.
Step 3: Deduct the business portion of shared costs Keep track of expenses shared between your business and personal life, such as gasoline and utilities. As long as you record the portion for business use, you can deduct those expenses.
TIP: Keep detailed records of the business-related share of expenses used for both your business and personal life, such as car mileage, loan interest payments, and office space.
Step 4: Deduct some business food and travel Keep in mind that you can deduct reasonable costs for entertaining business clients, including small gifts, and doing business travel. In most cases this includes the cost of your transportation and meals.
TIP: Take notes about the business purpose of meals, transportation, and entertainment on your receipts. Things like the client, location, and what was discussed should be noted.
Step 5: Understand depreciation Learn when to annually depreciate the value of assets, such as company cars, instead of taking a one-time deduction. This rule often applies to expensive equipment that you expect to use over multiple years.
Step 6: Find easily missed deductions Find easily missed deductions, such as advertising expenses, education to improve your job skills, relocating expenses, supplies, postage, and banking fees.
Step 7: Be charitable Give money or items to charity and deduct the non-depreciated portion of the donation through your corporation's taxes. You can make the deduction on your personal taxes if your business is an S corporation, partnership, or LLC.
Step 8: Deduct professionals' fees Deduct the cost of most common fees you have to pay to professionals for help with running your business, such as lawyers and consultants.
Step 9: Get tax advice Seek advice from a tax professional when your taxes get complicated or if you are unsure about a particular expense. Now you have one more incentive to use their services -- knowing that you can take another deduction for it.
FACT: In 2009, rapper Method Man of the Wu-Tang Clan told reporters he forgot to pay his taxes for several years because he was "too high."