Two words every business owner loves to hear during tax time: tax deductions. Outside ‘normal’ business expenses used as tax deductions, there are numerous creative deductions you may or may not have been taking advantage of all along. We’ll walk through an extensive list of creative tax deductions to benefit from this tax season.
How Do You Report Tax Deductions?
As a sole proprietor or Limited Liability Company (LLC), reporting your tax deductions is not as daunting as it might seem. Tax deductions are filed on a Schedule C, an Internal Revenue Service (IRS) form that captures profits and losses in your business from the previous year. On Schedule C, you’ll be able to list and itemize your business expenses as a tax deduction to help reduce the amount of taxable income you’ll be required to pay the IRS.
Should You Itemize Deductions?
If your itemized deductions exceed the standard deduction amount, it is recommended you itemize to take full advantage of all the unique ways to reduce your taxable income. If you’re unsure of this process, consult a tax professional to walk you through how to itemize.
30 Creative But Legal Tax Deductions
Now that you understand the basics of how and where to report deductions on your taxes, let’s explore creative, and perfectly legal, deductions you should be including.
1. Body Oil
Whether you’re a masseuse or bodybuilder lathering up your own body for a show or providing a massage to clients, body oil is considered a necessary cost incurred for both types of professions and is a 100% legal tax deduction.
2. Car or Truck Expenses
Taking advantage of the use of your car or truck expenses as a business owner is a must. When using car or truck expenses as a tax deduction, you’ll be required to use either the standard mileage deduction, which includes expenses and maintenance in costs per mile, or the actual expense deduction which is an actual itemized list of deductions such as gas, car repairs, tires, insurance, and more. Keep in mind you’ll only be permitted to use one of the two methods.
3. Cell Phone
It’s likely you will use a cell phone in some aspect of your business operations. You’re allowed to deduct the amount of usage your business requires as a percentage on your Schedule C. For instance, if you use your phone for 30% of your business and the other 70% is personal use, you’re allowed to use a 30% deduction of your phone and bill for tax purposes.
4. Charitable Causes
Similar to a donation as a personal expense, charitable cause donations are tax deductible. Charitable gifts allowed for deduction are cash, travel expenses to help an organization, and property or equipment gifts. The amount of the deduction depends on the amount and type of organization (qualified vs. non-qualified) but generally can range as high as 60% of adjusted gross income. Remember, only donate to a charity out of goodwill, not solely for the tax deduction.
Clothing is also a legal tax deduction. As a sole proprietor, you’re permitted to write off clothing as long as it’s worn for work and only worn for work, not everyday wear. An example of a tax deduction for clothing would be scrubs, construction clothing, or clothing used for ‘promotional purposes’.
6. Commissions and Fees
Commissions and fees are a category on Schedule C defined as “Amounts paid for services rendered on behalf of your business”. These amounts include commissions paid for sales, and fees for organizations, associations, and vendors such as Amazon, Etsy, or eBay.
7. Contract Labor
Another category on Schedule C is contract labor. This deduction is designed for any amounts paid to independent contractors completing work on behalf of your business. If you run a marketing design agency and hire out marketing work to a contractor, the amount you pay that contractor is fully tax deductible. Keep in mind if you pay a contractor $600 or more during the year, you’ll be required to file a Form 1099-NEC.
8. Cost of Commuting
Mileage incurred while driving for business-related activities such as worksites, travel to the airport and meetings are tax deductible in terms of cost per mileage. However, it is important to note that the IRS doesn’t allow deductions for commuting from your home to the office.
9. Conference Expenses and Education
The costs of attending conferences and education related to your business are fully tax deductible. While attending conferences, be sure to account for all your meals, drinks, hotel costs, and more as those are all deductible as part of the overall conference expenses as well.
For education, any further education to improve your skills or maintain specific certifications is all tax deductible.
10. Free Beer
What could be better? ‘Free’ beer purchased for customers, clients, and employees is considered an expendable write-off. Next time you refill the office beer fridge, be sure to keep your receipts.
11. Genetic Testing Kits
In recent years, the IRS ruled that genetic testing kits fall under the umbrella of “qualifying medical expenses” as medical-related care and are indeed tax deductible. Genetic testing kits can either be reimbursed as part of a flexible spending account (FSA), health savings account (HSA), or as a general expense for medical care.
12. Gym Memberships
Whether you’re a personal trainer or a business owner, consider deducting the cost of your gym membership from your taxes. While the line is blurry on this deduction, as long as you have a medical diagnosis from your doctor which requires the use of a gym, it does qualify as a deductible expense.
13. Hair Dye
If you’ve ever dyed your hair and that image became synonymous with your brand, you guessed it, tax deductible. The dye is considered an advertising and branding cost and is regarded as a business-related expense.
14. Home Office Utilities, Repairs, and Maintenance
Similar to the process of a cell phone, only a certain percentage of your home office, utilities, and repairs are tax deductible. This percentage is usually calculated via a formula of the overall square footage of your house.
Several types of insurance are tax deductible as long as they are an “ordinary” expense and necessary for the business. Some of those include general business insurance, flood insurance, auto insurance, and more.
Internet usage is another category that is deducted based on the percent used for business operations vs. personal use. If you use the internet for 50% of your business and the other 50% is personal use, you’re permitted to deduct 50% of your internet bill as an expense on your Schedule C.
17. Landscaping and Home Improvement
If you like to keep a well-manicured lawn, believe it or not, the cost of landscaping is a deductible expense. The only caveat is that you must have a home office and only the partial amount of landscaping and home improvement is deductible. If you regularly host clients at your home, you have a real case for making sure your pristine lawn is deductible. Home improvement expenses related to enhancing your home office space are also tax-deductible to an extent. Be sure to consult a tax professional to maintain compliance with home improvement-related deductions.
18. Legal Accounting and Services
As long as legal accounting and related services are actually ‘business-related’ services, these can qualify as a write-off.
19. Loan Interest
As a business owner, if you’ve had to take out a loan to start or grow your business, the interest paid on your loan is 100% tax deductible as long as the loan is from an institutional lender such as a bank.
20. Meals and Entertainment
If you host clients at an event or treat employees to a well-deserved meal, both categories are tax deductible under the current tax laws. Be sure to consult your tax professional on the types of meals, entertainment, and their respective deduction percentages.
21. Medical Expenses
Insurance premiums and qualified medical expenses are available as a tax deduction to you as a business owner. The IRS provides a list of qualified medical and dental expenses available as a deduction.
22. Moving Expenses
If you’ve decided to relocate your business for one reason or another, keep in mind certain parts of your move can be used as a write-off such as loading, unloading, transport, and more. As a sole proprietor moving your business, certain criteria must be met to meet the standards of a tax write-off. Those include the distance required to move and the amount of time worked as a full-time employee at the new location.
23. Online Marketing
Online marketing is essential for maintaining and growing your business as an entrepreneur. Expenses incurred for advertising your business such as digital advertising, graphic design, and more are all tax deductible. Non-digital advertising expenses that always qualify include business cards, flyers, billboards, and more.
24. Paying Wages to Kids
Wages paid to children are fully tax deductible. As long as the child is being compensated fairly for the work they’re conducting, use this write-off to your advantage. Be sure to create a formalized employment contract to avoid any hiccups or inquiries from the IRS.
Whether you breed pets or use your pets as part of your business marketing and advertising strategy, certain aspects of pet ownership are tax deductible. The most common items eligible are food and grooming. These also must directly correlate to the hours Scruffy “worked”.
While we hope this NEVER happens, cybercrimes are becoming more and more common today. While it can be difficult to decide whether or not to pay a ransom if the situation ever presents itself, the amount of the ransom is a business expense and falls under the category of theft. Be sure to document the incident, usually via a police report you can present to the IRS when you submit your taxes.
27. Retirement Contributions
Contributions made to retirement accounts to both employees and personal retirement accounts, if you’re a sole proprietor, are tax deductible expenses. These can include company matches to 401(k), contributions to SEP IRAs, and more.
Software purchased (or downloaded) for your business is deductible. Anything from mileage tracking software to project management software are all eligible.
29. Swimming Pools
As long as a swimming pool falls under medical care and is used for medical purposes, the cost of installation and general operating expenses are tax deductible.
30. Vehicle Registration
The expense of registering your vehicle is tax deductible but remember from earlier this falls under the standard mileage deduction or the actual expense deduction, but not both.
Do’s and Don’ts When Claiming Deductions
Now that you’re up-to-speed on all the creative items that can be tax deducted, be mindful of the Do’s and Don’ts of claiming these deductions to best prepare you for tax season:
- Consult a tax professional
- Keep records of all transactions
- Understand the Schedule C and associated expense categories
- Stay organized
- Wait until the last minute to file
- Assume all expenses are 100% deductible
- File on your own
- Fail to report other sources of income
Better Prepared for Tax Season
Now that you’re aware of all the different, creative tax deductions you’ll be better prepared come tax time on what you’re allowed to claim as expenses you wouldn’t normally consider. As always, be sure to consult a tax professional to guide you through the nuances of filing your business taxes.
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What are the standard tax deductions?
Standard tax deductions help reduce your business’s taxable income to reduce the amount of taxes you owe to the IRS.
Is art tax-deductible?
This depends if your business is art-related and the degree of the expense is necessary. Contact your local tax professional for more information.
What deductions can you claim without proof?
A general rule of thumb is to be sure and track and document all business-related expenses to avoid claims without proof.