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17 Common Tax Write-off For Side Business

17 Common Tax Write-off For Side Business
Ines Zemelman, EA
13 July 2022

Side hustles have become prevalent in the gig economy. Professionals in practically every area are now making money as a side business, whether it is through Upwork, Fiverr, or Uber. Plumbers and electricians use TaskRabbit, as do homeowners who rent out their homes on Airbnb.

What the side business has evolved into seems to have no limit, and because the IRS wants to tax you on your profits, this has created a new set of problems for this small business entity.

Before you start your side business, it is critical that you fully grasp the tax repercussion. But first, let’s look at what a gig job or side business is.

Let’s dive in to learn more about side business and tax write-offs for a side business.

What Is a Side Business?

A side business is a job that people do in addition to their full-time job. Why would someone choose to hold down many jobs? The answer is intricate.

Many people are dissatisfied with their current salary and decide to start a side business to supplement their income. Others are encouraged to grow their enthusiasm into something more than a hobby and many more are driven to test the viability of their business idea before quitting their employment to establish their own small business.

With the advent of the internet, starting a side business, particularly one that works online, is now easier than ever. And, if you can work from home, why not diversify your earnings and explore your options?

Although side hustles are a great way to fund a trip, pay off debt, or supplement discretionary income, everyone who has a side job must account for and pay taxes on money earned. Avoiding taxes is not an option since it will result in fines and penalties on top of the taxes payable. However, does starting a business, help with taxes? It all depends on your situation.

Can a Side Business Help Reduce Your Taxes?

"Can a side business help reduce your taxes?" many new business owners ask this question. Most of the time, the response is affirmative. Running your own business has advantages that many individuals who work full-time do not have. This is a wonderful thing since it gives you tax benefits, credits, and deductions that will help reduce your tax burden when you file your taxes during tax time, putting more money in your pocket or into your firm.

Tax Deductions for Side Business

To reduce the amount of income tax due, small businesses can write off various costs as tax deductions. 

The following are the top tax write-offs for side businesses:

1. Travel Costs For Business Purposes

All business travel expenses, including flights, hotels, tips, rental car fees, dry cleaning, meals, and other expenses, are tax-deductible. See the IRS website for a comprehensive list of deductible business travel expenses

Your trip must fulfill the following requirements to qualify as work-related travel:

  • Travel must be essential for your business.
  • The trip must take you away from your tax home, which is the city or area in which your company operates.
  • You must be away from your tax residence for more than a usual work day, and you must sleep or relax en route.

2. Car Use For Work Purposes

If you just use your car for your side business, you can write off all expenses related to its operation and maintenance. If you use your car for both business and personal reasons, you can only deduct expenses related to the commercial usage of the vehicle. You can either deduct the actual miles traveled for business or claim the standard mileage deduction of $0.58 per mile driven for business driving.

3. Expenses For a Home Office

Under the simplified IRS standards for home office expenditures, small businesses and freelancers can deduct five dollars for every square foot of your house utilized for commercial purposes, up to a maximum of 300 square feet. To qualify for a tax deduction, your workplace must be used solely for business (you cannot deduct the square footage of your dining room if you work at the table all day) and you must use the home office as your principal site for doing business on a regular basis.

4. Phone and Internet Expenses

If using the phone and the internet is necessary to run your business, you can deduct these expenses. However, if you use your phone and internet for business and personal activities, you can only deduct the percentage of your costs linked to your business use. For example, if roughly half of your internet usage is for commercial purposes, you can deduct 50% of your internet costs for the year.

5. Business Insurance

You can write off the cost of your side business insurance for tax purposes on your returns. If you have a home office or utilize a section of your home for business purposes, you can deduct the cost of your renter's insurance as part of your home office write-offs.

6. Office Supplies

You can write off the cost of your side business office supplies like printers, paper, pencils, computers, and work-related software if you utilize them for business purposes during the year they were purchased. Work-related postage and shipping charges are also deductible. Keep all receipts for office supplies purchases for future reference.

7. Business Interest and Bank Fees

The bank will charge you interest if you borrow money to fuel your company's activities. When it comes to tax season, you can deduct interest on both company loans and business credit cards. You can also deduct any fees and other expenses associated with your business bank account and credit card, such as monthly service fees and yearly credit card fees.

8. Depreciation

Depreciation is the process of writing off the cost of an expensive item, such as a car or machinery, over the usable life of that item rather than deducting it all at once for a single tax year. Long-term company investments that are more expensive are frequently depreciated so that the initial expenditure is returned throughout the item's useful life. 

Here's how to calculate depreciation:

Depreciation = Total cost of the asset / Asset useful life

9. Fees for Professional Services

Any professional service expenses required for the operation of your business, such as legal, accounting, and bookkeeping services, are tax-deductible. Accounting or bookkeeping software used for your business taxes would also qualify as a tax deduction for a side business. If you're having problems identifying whether a certain professional service charge is for business or personal use, the IRS's rules for legal and professional fees might assist you to decide.

10. Compensation and Perks

If you have a side business and have workers, you can deduct their wages from your taxes, as well as their perks and even vacation money. The following conditions must be met in order to deduct salary and benefit costs:

  • The employee is not a sole proprietor, partner, or member of an LLC in the company.
  • The pay is both reasonable and required.
  • The employee fulfilled the services allocated to him/her.

11. Education

Any educational costs you incur to add value to your firm are 100% tax-deductible. The course or workshop must increase your abilities or help you maintain your professional knowledge in order to qualify for education-related expenditures. 

The following costs for education are eligible for deductions:

  • Courses and training sessions relevant to your line of work
  • Webinars and conferences
  • Subscriptions to trade publications
  • Books pertaining to your field

12. Medical Bills

You can deduct insurance premiums as well as medical expenses such as doctor's bills, prescription medicines, and home care. You can deduct your health and dental insurance premiums if you are self-employed and pay for your own health insurance.

13. Property Taxes

State and municipal real estate taxes are deductible from your taxable income. These deductions include property taxes, and you can claim up to $10,000 in total.

14. Retirement Contributions

Contributing to an Individual Retirement Account (IRA) decreases your annual taxable income. Your total IRA contributions cannot exceed your annual income or the yearly maximum contribution, whichever is less.

15. Promotional Activities

You can fully deduct marketing-related costs, such as designing and maintaining a website, print and digital advertising, and business card printing.

16. Entertainment for Clients and Employees

If you take business clients out for entertainment, you can write off the cost as long as you talk business throughout the meeting and the entertainment occurs in a business environment for business reasons. You can deduct half of the cost of your entertainment costs. You can also deduct up to 100% of the cost of social events for your employees.

17. Startup Expenses

You are eligible to claim a deduction for up to $5,000 in starting costs if you started a new business endeavor in the most recent tax year. This might involve marketing, travel, and training costs for your new firm.

The Bottom Line

A side business may be a great way to supplement your income, develop a nest egg, or pay off debt. However, because each side gig is unique, contact a licensed tax professional before filing and claiming deductions.

Ines Zemelman, EA
Founder of TFX