What is a business tax deduction for online businesses?
A business tax deduction is an expense for your business that lowers your taxable income.
Tax deductions are also commonly called tax write-offs as well.
Now of course you can’t just spend money on anything in the name of business and call it a deduction, there are some simple rules to follow and a few weird caveats.
This is a funny video, but the dad, Johnny Rose, actually explains this pretty well.
Business tax deductions must be ordinary and necessary for your business to function or grow.
This means if you believe the expense is helping your business you need to be prepared to defend it to the IRS if you’re ever audited. And remember, while we’re surrounded by online businesses, we’re still the minority with only 28% of businesses being conducted online according to IBISWorld.
So keep in mind that your auditor may have no idea how getting your Human Design chart read impacts your business. You have to prove it and ultimately they will decide if it is ordinary and necessary.
On the other hand, there are some universal expenses that all would agree are ordinary and necessary, such as:
Bookkeeper
Tax Professional
Payment Processing Fees
Phone
Internet
Software
Web Domain & Hosting
Advertising
Ad Manager
Assistant
Web Designer
Payroll
Travel specifically for business
Business car use
Office Supplies
Business Coaching
Business Courses & Books
Etc.
There are a couple of weird caveats that many business owners don’t know about!
Meals
Most years, business meals are only 50% deductible.
In 2021 and 2022, a temporary exception was made to make business meals at restaurants 100% deductible. All other meals purchased somewhere like the grocery store or gas station were left at 50% deductible.
For the meal to be deductible you must be meeting with someone like a current or potential client, vendor, or while traveling overnight. In most cases, a meal or coffee on your own are only deductible if you’re traveling overnight. Your morning coffee at Starbucks as you work is not deductible. Versus a coffee at Starbucks while at an overnight business convention would be deductible.
Entertainment
In years past entertainment was also 50% deductible, but not anymore. Entertaining clients is no longer deductible.
Gifts
Only $25 of gifts per client, vendor, or employee are deductible. So for example, if you give a $50 gift to a client, only $25 is deductible. The other $25 is not deductible.
Charitable Contributions
The rules on charitable contributions are a bit complex and different for different types of entities. But in most cases, charitable contributions aren’t deductible for businesses. The charitable contributions made from your business will be moved to your personal return and there are some limitations in regards to how much you can deduct.
Cell Phone & Internet (also used personally)
Expenses like your cell phone and home internet can be deductible. It is based on the percentage of business use.
So for example, if you use your internet 25% for business and your monthly internet bill is $65, the business portion is $16.25/mo.
Travel
While all business travel is 100% deductible (except for meals which are 50%), the rules change a little bit if you include personal vacation time in your business trip.
As long as most of the trip is spent on business with some small personal fun, you will need to keep business and personal expenses separate.
Example business expenses in this case would be: flights, hotel stay on nights when business activities took place, meals for you on days with business activities, Uber/Lyft to and from business activities from hotel.
Examples of personal expenses in this case would be: flight for family members, hotel stay on nights when no business activities took place, meals for family members, travel to personal activities, personal entertainment.
If the trip is primarily for vacation and you work in some business activities while there, only business activities are deductible.
Example business expenses: Uber/Lyft to business activity, 1-2 night hotel stay on day of business event, meals on the 1-2 day business event.
Example personal expenses: flight for you and family, meals on the other days of vacation, all other travel and entertainment.
