You started your own online business, and now you have to do your own accounting for your business. But do you really know what counts as an expense deduction and what doesn't count?
Worry no more! I've got you covered and now you will know exactly what you can take as a deduction and what you can't.
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Tracking Your Expenses
There are programs out there to help you with your bookkeeping and keeping track of not only your business expenses, but also your income and everything related to your business finances.
Some of the popular programs include: Freshbooks, Quickbooks and Xero. These programs also integrate with your bank accounts and credit cards so that you can easily track your income and expenses.
Another feature of these online bookkeeping programs is that you can keep snapshots of your receipts so that they are readily available should you ever get audited.
We live in the computer age where paper everything isn't kept as much anymore, we prefer to have electronic copies of everything. But these electronic copies can also cause clutter. So why not include a copy of your receipts within your bookkeeping programs? It just makes life so much easier.
Deductions that You Can Take
There are a lot of costs of doing business. Most of these costs are deductible on your tax return. This is by no means a complete, comprehensive list. But it should answer most of your questions. If you have additional questions, leave a comment below and I'll answer your question, as well as update this guide.
Advertising includes all of the things that you do to promote your business. This can include:
- Any type of ad you can think of (Facebook ads, Google ads, radio and podcast ads, TV commercials, creating ads for your car, ads in print or digital media and publications, etc.)
- Email marketing (Active Campaign, ConvertKit, Mailerlite, Mail Chimp, etc.)
- Influencer marketing costs
- Any swag that you have created that has your business name on it
- Sponsoring an event
- Sponsored content
- Business cards, postcards, flyers, all printed material that will promote your business
Many business like to donate to charitable organizations. You can donate money, or buy items to donate.
Unfortunately, this deduction can only be taken by C-corps and only 10% or less of the income can be used for this expense.
Bank and merchant fees
These are the fees that companies like PayPal, Stripe, Authorize.net, Moonclerk, etc. charge you for collecting money for you. It is a cost of doing business and you can deduct it as an expense in your business.
You should NOT be raising your fees to your customers to cover this cost. It is not their responsibility to cover this cost.
Also when you try to find ways around collecting money that doesn't use these forms of collection, it doesn't offer you the same protections for your money or your client's money.
Your bank may also charge you a fee to maintain an account unless you have a certain balance at all times during the month.
These are all expenses that count as deductions.
Employee benefit programs
When you are a sole proprietor or a single member LLC, you will rarely have these expenses because you will rarely have employees. But when you do have an employees or count yourself as employee because you are an S Corp or C Corp, then you would have employee benefit programs.
These programs include:
- Health insurance plans
- Life insurance plans
- Dependent care support
- Retirement plan contribution
- Awards and bonuses
- Education assistance
- Pension and profit sharing programs
Most of these benefits your business can still pay for you as the owner no matter what type of business you do own. But when you get to the point of paying these benefits for yourself or your employees, it is highly recommended that you talk to an accountant, a financial advisor and possibly even a lawyer to make sure you have all of your bases covered. Further advice about these topics would need to come from an expert who knows exactly how to answer your questions.
Some businesses will purchase other forms of insurance, like business liability insurance or event insurance. This insurance can be written off as a business expense.
If you have a vehicle that your business owns 100%, then the insurance premiums for the car would also be considered an expense deduction.
If you use a business credit card or take out a loan or line of credit for your business, the interest charged is an expense deduction.
Side note: if you have a credit card that you use for both personal and business expenses, the interest deduction can not be taken.
Legal and professional services
When you hire a professional - lawyer, accountant, bookkeeper, etc. - you can deduct your costs from these professionals as a business expense.
Office expenses include things like paper, notebooks, pens, pencils (your typical office supplies); small computer equipment like monitors, keyboards and headphones; and the cleaning supplies and services for cleaning your office. These expenses allow you to make your workplace for productive so that you can get more work done in your business.
When you have an online business, you also usually have cloud storage (Dropbox, Amazon S3, Google Drive), email (like GSuite), and other online programs that help you run your business. These would count as office expenses because they are like file folders and supplies for running your business more efficiently.
Rent or lease
Most online business owners do not have the rental expense, unless they rent an office outside of their home. But if you do rent for your business, the cost of the rental would be considered an expense.
If you pay to rent a space for an event, this is also an expense deduction.
When you decide to rent a piece of equipment before buying it, that rental fee is also an expense deduction.
Repairs and maintenance
If you incur any costs to repair or maintain your office equipment, these are also common business expenses. Some of the common expenses include any maintenance to creative equipment (your computer, camera, etc.) to keep it in tip top shape so that your business continues to run the best it can. It would also include repairs to this same equipment.
Supplies are the things that you purchase that you are constantly replacing. These supplies include items like stock photos, fonts, website themes, and other digital supplies; and art supplies and materials that are needed for hand-crafted goods.
Taxes and licenses
Have you paid fees to have a local business license or to form a specific business formation (LLC, S Corp, C Corp) or the renewal fees; the employer portion of payroll taxes; trademark fees; or any professional licenses that you need for yourself? These categories all fall under your taxes and licenses expenses for your business.
Travel and meals
This expense is one of the ones that causes the most questions and confusion. When you travel for business purposes (not personal purposes), then the costs of the trip can be deducted as an expense for just about every cost of the trip. These trip expenses can include:
- Lodging - hotel, Airbnb, resort, renting a house
- Transportation around the location - taxis, Ubers, Lyfts, car rental
- Transportation to the location - airfare, train, bus tickets
- 50% of meal costs (keep copies of the actual receipts or use the per diem rate)
- Laundry and dry cleaning while traveling
- Tips left for service providers at the hotel
Now for the more trickier part - your meals.
While at an event that you have to travel to, are not staying at your home, the meals are deductible at 50% of the cost (or per diem rate).
But when you are purchasing food during the work day, most of this is NOT deductible. If you have a lunch meeting with a client or business partner or someone else you are discussing business with, then the purchase of a breakfast, lunch or dinner meeting is deductible.
Also, if you are working for the day out of a coffee shop or cafe, the cost of the food and drinks that you purchase are NOT deductible.
What if you are a Travel Blogger?
If you are a travel blogger and most of your trips are both work and pleasure, this is the stance of the IRS summarized:
The costs of the trip that are for business use are deductible.
If you take a companion or family with you on the trip, their cost of the trip is not deductible, only your cost as the business owner.
If the trip was primarily for business use, then the cost of airfare is most likely deductible. Meals and lodging are deductible for the portion of the trip that you are working on your business.
For example, you and your family take a trip to San Diego, California. You are taking this trip to understand how San Diego is laid out, what are the best places to visit while there, where you need to eat while there, etc. Your airfare for the trip would most likely be deductible, while your family’s airfare would not.
When you and your family are visiting restaurants, your portion of the meal would be deductible as long as you covering the restaurant in your blog, while your family’s portion of the meal is not deductible.
When you are visiting sites around the city, if you have pay an entry fee to see the site, your fee is deductible as long as you are covering the site on your blog, while your family’s cost to see the site is not deductible.
You will have to use your best judgment and make sure the places you are visiting and deducting the costs for are shown on your blog.
Most utilities were included already covered under the home office deduction section above. But there are some other deductions that may also count here.
Phone costs that are used for your business (Note: if you use the same phone for your personal and business, you would only be able to deduct the business usage percentage for your business deduction)
The cost of internet (Note: again the personal and business usage percentages apply) - this also includes costs that you would incur on the go like mobile hot spots, and on planes and in hotels.
You run an online business, so you are going to have a website, and therefore website expenses. These website expenses are an expense deduction.
These expenses include website hosting fees, website themes, website plugins, etc.
Wages and contract labor
There are 2 different topics here, but we will cover them both.
Contract labor is when you hire independent contractors. For most online businesses, this is exactly what you do. You will hire someone to help you with building your website. You could hire a virtual assistant. Contract labor is when you hire someone to help you in your business, but they are not your employee. The IRS also has a test for whether or not you know someone is an independent contractor or not that you could also test. These independent contractors are the people that you are going to issue a 1099 to if you pay them more than $600 in one calendar year.
Wages are paid to employees. When you have an S Corp or a C Corp, you as the business owner can be paid as an employee by the business.
Business use of your home
This deduction is one that many business owners don't take because it can be complicated.
If you have a dedicated space in your home that is only for your business - like a whole room, or a corner of a room, then you can enjoy this exemption and deduct parts of the costs of your home expenses for your business expenses.
There are two ways that you can calculate this deduction:
- Figure out the percentage of how much of your home is used for business purposes and multiply that percentage by your total utilities, rent or mortgage, insurance and home repairs. For example, the space that you use for your business is 25 square feet and your whole home is 1000 square feet. Your percentage would be 2.5% multiplied against your home expenses for the year.
- Multiply the square feet of your usage for business by $5 to get your deduction. Using the same example above, you would use 25 square feet times $5 to get a $125 deduction.
Also check out: Guide to the Home Office Deduction
Depreciation and Amortization
There is another section below for assets that includes the most common assets that are purchased.
Every year you would get a depreciation and/or amortization expense for a part of the useful life of of that asset instead of using the whole cost in one year, you get to spread it out over multiple years.
Depreciation is used for physical assets and amortization is used for the intangible assets.
Cost of goods sold
This applies if you sell physical products, and rarely applies to online businesses. When you sell courses and informational and services that are available online, you usually do not have cost of goods sold.
By definition cost of good sold includes any expenses that go into creating and delivery of the products or services that you sell. This includes both direct and indirect costs. The direct costs include items like the raw materials you transform into the final product, packaging and any items for resale. The indirect costs include things like labor and the costs to store products.
The reason this does not usually apply to online businesses is because the indirect costs that you associate with creating your products and services are not one off expenses. They are expenses that you have whether you are creating this product or service or not.
For example, your subscription to Canva or Adobe Creative Cloud you would have whether you were creating this product or service or not. The same with your computer, you wouldn't go out and buy a brand new computer just to create this product or service. And even if you do, you will be using this computer even after your course or service is complete.
Car and truck expenses
You have 2 options with this one, but you can only pick one option and it must be consistent.
Option 1: Keep track of all of your business mileage and use the IRS's standard mileage deduction rate to calculate how much you can deduct.
Option 2: Keep track of your business mileage, as well as your total mileage for the year. Then convert this to a percentage and multiply that percentage times all of your individual vehicle expenses (gas, maintenance, and depreciation).
For both options, you need to track your mileage every time you drive for business purposes. This can include driving your car to the airport for a business trip, driving to a business conference, etc.
But also make sure that you keep copies of all of your tolls and parking fees, because these are separate from your mileage/car expenses. These also would count if you rented a car (as would the car rental) for a business trip.
I rarely see assets talked about by many accountants when they teach business owners about their expenses. In an online business, you most likely aren't going to have many assets though.
But this includes things like a new computer, office furniture, or even an office and it's renovations. These would not count as an expense, but you would get depreciation expense as a deduction each year for the useful life of the item.
Common assets include:
- Cameras and lenses and other camera equipment
- Trade Secrets
- Licensing agreements
- Production equipment
- Vehicles purchases only for business use
Other expenses that you can't forget
Affiliate expenses - Do you offer an affiliate program for your courses and/or services? The fees that you pay to your affiliates is an expense for your business.
Shipping expenses - Do you ship packages to your customers or clients? Do you mail gifts to your clients? The postage fees and costs of shipping are considered a business expense.
Software subscriptions - Software subscriptions are very common these days. Gone are the days when you would normally just go to the store and buy a CD that has the software that you want to purchase. Now you will go to the company's website and purchase a subscription to access their software for a specific amount of time. I personally like to make a separate line item for software expense, but you can also count it under office expenses or office supplies.
Education costs - these costs include anything that helps you improve your knowledge and skills related to your business and includes things like ebooks, physical books, and online courses.
Deductions that you Cannot Take
I mentioned in the beginning that this list is in no way a comprehensive list. But this list of deductions that you cannot take will help you in your business.
While these are expenses for your business, you cannot take them as a deduction on your tax return.
You are purchasing clothing for a brand photo shoot. The clothes that you are buying for this photoshoot should count as a business expense, right?
After the photo shoot is over, what are you going to do with that clothing? You'll most likely wear it for personal reasons.
Since most clothing is something that can be worn for both business and personal, it is an expense that you can deduct on your tax return.
There is an exception here though. But this exception rarely applies to online business. The exception is clothing that can ONLY be worn for work purposes.
Think a mechanic's overalls with the company logo. You wouldn't just wear these overalls anywhere, you would wear them to work.
But for an online business, this exception rarely applies.
Yes meals are included in both sections - what you can deduct and what you can't deduct. That's because there are exceptions to the meals that you can deduct.
What you can't deduct when it comes to meals includes:
- the food and drink that you consume when working at a coffee shop or restaurant
- meals eaten at an airport or while traveling
- basically any meal that is not a business meeting
This applies similarly to the clothing deduction that you can't take. You have to eat on a regular basis. But unless the meal is an actual business meeting (with another person, yes introverts I know you can have a business meeting with yourself), then it doesn't qualify for the deduction.
You can still pay for these meals with your business income. You just can't claim them as expense on your tax return.
It is normal for a small business owner to pay for some of their personal expenses with their business income before they actually pay themselves.
But these personal expenses do not count as a deduction. They would just be counted as owner's draw, or money that the owner receives from the business.
It is recommended that you don't pay for these personal expenses from the business and keep your business and personal bank accounts separated. But it happens. So you just have to remember that at the end of the year, you can't actually deduct these from your business tax return.
The best thing to do here is to get into the habit of transferring the money to you personal account to pay yourself, instead of using your business account to make the payments. Don't get into the habit of "this is just easier to do."
Other Pro Tips when it Comes to Your Business Expenses
Always try to find a professional to help you with the questions that you don't understand. It is also best to find a professional to help you with your business finances tracking.
In my experience in being an online business owner, I have found that many of the accountants don't understand online business. But there are quite a few accountants that I have found that do understand online business.
While it is recommended to have an accountant in your state, you can find one in the online world as well. One in the online world is most likely going to be much more versed in your line of work and understand what you are doing and be able to help you much easier.
And if keeping track of your business finances isn't for you, then please hire a bookkeeper! And make sure you do your research when you hire a bookkeeper. Make sure your bookkeeper knows what they are doing and they understand accounting. You can also check out my guide to hiring an accountant and a bookkeeper.
You really should be looking at your financial statements on a monthly basis. And to do that, you need to be tracking your income and expenses.
If you want to learn how to do this for yourself, I have created a course to help you understand your business finances. And with the purchase of this course, you also get direct access to me (and other business owners) to have your questions answered.
I know this is a long guide, but this is also a very big topic and one that is questioned a lot by business owners who are not accountants. You can refer to this guide as often as you need.
I've also made this guide into a downloadable PDF for you have available as well.
What other business expense deductions do you have that weren't covered here?
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