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On the fallacy of business expenses
10 years ago
Often, someone just starting their business will be told to keep track of all their business expenses because they can write them off their taxes. While keeping track of your expenses is a very good thing to do, it is not likely to make much difference when it comes to your taxes.
Our company, Seward Street Studios, is a DBA, which means that our company and I share the same social security number. The company’s income is my income, the company’s expenses are my expenses. The upside is that it is the easiest, and least expensive way to register a business. Perfect if it’s just you , your dog, and your embroidery machine. The disadvantage is that is someone should sue you and win, you are personally responsible.
For as long as we have been an officially registered with the government business, I have been doing my taxes with the H&R Block Deluxe software. In addition to personal taxes, it handles all the info necessary for a small home based business like ours.
As I work my way through the software, it asks all the necessary questions. Travel expenses? Equipment purchases? Supplies, rent, insurance, fees, etc. It’s all covered. It actually takes more time to gather the numbers than it takes to fill out the software.
At the end, it asks a very important question, do I want to take the itemized deduction or the standard deduction? The standard deduction is the one we would get just for being a married couple. The itemized deduction is the one I get by itemizing all my business expenses. You have to pick one, you can’t have both.
Our business expenses last year came out to about $19,000.00. It was a very good year for us so a large part of that was the purchase of some new equipment. But it also includes all the hotel, meals, travel etc. that one would usually think of as things that you can write off as a business.
The thing is, you don’t get to write all of it off, just a percentage. So even though our expenses were $19k, the amount we can actually deduct from our taxes comes out to $887.00
The standard deduction for a married couple is $12,400.00 Obviously, I take the standard deduction every time.
I don’t know what the magic formula is. I’m not an accountant, I don’t know anything about taxes beyond the questions asked by the software. But it generally ends up that you can deduct somewhere around 5% of the actual expenses. At that rate, I would need to spend around $248,000.00 in expenses to make itemized deductions match standardized deductions.
So when that helpful friend encourages you to spend money on something because “you can write it off as a business expense” think twice. You can only write of about 5% of it, and only if your total amount exceeds your standardized deduction.
Our company, Seward Street Studios, is a DBA, which means that our company and I share the same social security number. The company’s income is my income, the company’s expenses are my expenses. The upside is that it is the easiest, and least expensive way to register a business. Perfect if it’s just you , your dog, and your embroidery machine. The disadvantage is that is someone should sue you and win, you are personally responsible.
For as long as we have been an officially registered with the government business, I have been doing my taxes with the H&R Block Deluxe software. In addition to personal taxes, it handles all the info necessary for a small home based business like ours.
As I work my way through the software, it asks all the necessary questions. Travel expenses? Equipment purchases? Supplies, rent, insurance, fees, etc. It’s all covered. It actually takes more time to gather the numbers than it takes to fill out the software.
At the end, it asks a very important question, do I want to take the itemized deduction or the standard deduction? The standard deduction is the one we would get just for being a married couple. The itemized deduction is the one I get by itemizing all my business expenses. You have to pick one, you can’t have both.
Our business expenses last year came out to about $19,000.00. It was a very good year for us so a large part of that was the purchase of some new equipment. But it also includes all the hotel, meals, travel etc. that one would usually think of as things that you can write off as a business.
The thing is, you don’t get to write all of it off, just a percentage. So even though our expenses were $19k, the amount we can actually deduct from our taxes comes out to $887.00
The standard deduction for a married couple is $12,400.00 Obviously, I take the standard deduction every time.
I don’t know what the magic formula is. I’m not an accountant, I don’t know anything about taxes beyond the questions asked by the software. But it generally ends up that you can deduct somewhere around 5% of the actual expenses. At that rate, I would need to spend around $248,000.00 in expenses to make itemized deductions match standardized deductions.
So when that helpful friend encourages you to spend money on something because “you can write it off as a business expense” think twice. You can only write of about 5% of it, and only if your total amount exceeds your standardized deduction.
The IRS has many publications explaining the basics of business taxes, that's how I learned when I started.
http://www.irs.gov/Businesses/Small.....ing-a-Business
To your second point.
Based on your comment, I took the extra step and pulled up the forms generated by the software. I hadn't really looked at them before now. Since we file electronically, I technically never have to. I do print out hard copies for our records, but I've never looked at them. Lo and behold, there were those Schedule C forms you were talkng about.
The general 'flow" of the software looks like: Your regular income>your business income>deductions>choose itemized or standard.
What is really happening is what you said: Your regular income >V Your Business>your business income>your business deductions> buiness profit/loss calculated >^ Your income adjusted by business profit/loss> Personal deductions> chose itemized or standard personal deduction.
Which makes way more sense.
We don't own a house, have kids, education bills, medical bills, or any of the other usual personal deductions. This explains why the itemized deduction amount has always been small, no matter how much we've spent on the company. Those numbers have no relation to each other.
Thank you for the promt into a better understanding of how our business taxes work.
Good advice, though. Thank you!