- As a small business owner
you've probably heard of tax write-offs,
and you've probably thought to yourself,
what is a tax write-off?
Because true story,
when do we ever learn about stuff like taxes?
Well, today I'm teaching you all about
what tax write offs are and why they matter.
(upbeat music)
I've been teaching small business owners
about business finance for over 10 years.
So if the idea of learning
about taxes scares you,
don't worry.
Taxes act way cooler than they actually are.
Once I teach you a few tax basics,
you'll see that you can totally
handle the tax side of your business.
How do write offs work?
Write offs, also known as tax deductions,
are an absolute dreamboat on your taxes
because they lower your tax liability,
which means that they lower
how much your final tax bill will be
and how much you owe the government.
The reason these necessary and ordinary expenses
are called write offs or tax deductions
is because on your taxes
you deduct them from your total revenue,
and that gives you your taxable profits.
It looks like this.
Total revenue,
which is just a fancy way of saying all your income,
minus your tax deductions equals your taxable profits,
which is essentially your personal income.
So the more tax deductions you have,
the less you're going to pay in taxes.
What is a tax write off?
Now that you know why you should
love and adore tax write offs,
let's talk about what a tax write off is.
A tax write off is also known as a tax deduction.
The IRS defines a tax deduction as an ordinary
and necessary expense for your business,
which sounds a little ambiguous
so let's break that down.
Ordinary means that it's an expense that's
pretty typical for businesses.
Some examples are advertising expenses,
travel, meals, and supplies.
Most businesses will have these types of expenses
which is why they're called ordinary.
Necessary is a little bit trickier.
It's an expense that is necessary
for you to operate your business.
Now different industries have different needs,
so while ordinary expenses
are pretty much the same
across all businesses,
necessary expenses will vary.
A photographer's necessary expenses
will be photography supplies.
A painter's necessary expenses
will be paint brushes.
A hairstylist's necessary expenses
will be shampoo and hair brushes.
I think you get the gist.
Basically it depends on the type of business you have
how your expense relates to what you do.
There are also tax write offs
that I call split deductions.
Split deductions are expenses
that are both personal expenses,
as in not tax deductible,
and business expenses.
With split deductions
you can only write off
the business portion of the expense,
the personal portion is not deductible.
Examples of split deductions
are home office expenses,
a percentage of your cellphone bill,
and a percentage of your home internet.
I'm not gonna go into detail about split deductions,
but there is a blog post link below
called 3 Types of Tax Deductions and How to Track Them.
That post goes more in detail about split deductions.
So aren't all business expenses tax write offs?
Um no!
Just because it's an expense for your business
does not mean the IRS will classify it as a tax write off.
For example under the new tax law,
client entertainment is no longer deductible.
So if you take your client out to My Little Ponies on Ice,
you can still consider it a business expense internally
but you cannot claim it as a tax deduction.
Most business expenses will be tax deductions
but it's important to know that not every single expense
will fall under the necessary and ordinary umbrella.
How do I know if I can write it off?
So we've talked a lot about necessary and ordinary expenses,
but it can still feel really confusing
when you're trying to figure out
if something is really a business expense.
Because real talk,
as self-employed people,
so much of our personal lives
are intertwined with our business,
and of course we don't want to be
lying on our taxes about our deductions
or writing things off that
really aren't business expenses.
So how do you make sure
that you're writing off the right expenses?
Well, first, if it's a legit business expense,
do not fear the tax deduction.
I've talked to so many business owners
who aren't writing off legitimate business expenses
because they're afraid of the IRS.
Seriously, if it's necessary
or ordinary for your business,
then take the deduction.
But if you're unsure if an expense
is actually necessary or ordinary,
here are some questions you can ask yourself.
One, does it have anything to do with my business?
Now obviously the answer should be yes.
If it's not yes, then you have no business
trying to make it a tax write off.
Two, what does this have to do with my business?
And think this through.
How does this expense relate to your daily operations,
performing your services or selling your products?
Three, is it an expense that the IRS
has deemed non-deductible?
There's a blog post link below called
5 Write Off Mistakes That Can Get You in Trouble
that talks about business expenses
that people try to write off but really can't.
Four, can I justify it to an IRS auditor?
When you get audited,
you have the chance to explain
suspicious expenses to your auditor.
If you were talking to an auditor,
do you think you could make a compelling case
for why this expense is related to your business?
And when I say compelling,
I'm not talking about a bunch of
mental gymnastics to justify something.
I'm talking about a really clear
straightforward answer for writing it off.
If not, you probably shouldn't write it off.
If you are still unclear about an expense,
keep track of it but also make a note
to talk to a tax professional about the expense.
Also in the Description I've linked
to a bunch of blog posts about tax write offs.
These posts will give you an idea of the types of deductions
you could be taking as a small business owner.
And I have something super special for you
which is my Biz Finance Survival Kit.
It's free and not only comes
with the tax write off cheat sheet
but also with four other cheat sheets
and checklists for your small business.
You can download the free survival kit
using the link in the Description below.
If you liked this video,
let me know in the Comments below
what was your biggest takeaway?
And make sure you subscribe to my channel
because every week I share a new video
about how to organize and stay on top
of your business finances.
I'll see you in the next video.