What is Considered Tax Deductible?
Apr 10, 2023Today we'll be discussing tax deductions for entrepreneurs. As a business owner, understanding what is deductible and what isn't can be crucial to keeping more of what you earn.
We'll dive into what deductions are and how they work. We'll explore what makes an expense actually deductible and what qualifies as a business expense. It's important to know the boundaries and risks involved in claiming deductions on your tax return, so we'll discuss a few methods that may help reduce the likelihood of getting flagged. We'll also talk about the importance of being able to defend the business case for the expenses you're claiming.
Join us as we navigate the world of tax deductions for entrepreneurs and learn how to take advantage of the deductions available to you.
In this episode, you will learn the following:
1. Consult with a tax professional for individual advice and guidance tailored to your unique business and financial situation.
2. Keep detailed documentation of all business expenses, including receipts and notes about the purpose of each expenditure.
3. Consider working with a tax strategist or accountant to help navigate the tax deduction process and ensure the best outcome for your business.
What you'll hear in this episode:
[3:00] What actually is a tax deduction?
[4:53] What makes an expense actually deductible?
[6:26] What is considered a business expense?
[8:53] What are the risks and boundaries of taking deductions?
[10:00] The 3 D's necessary to take a deduction.
[12:23] Tip to spread out your expenses between categories.
[15:30] The importance of being able to defend the business case as much as the deduction.
Here are some brief snippets from this episode:
00:02:50 - What is a Deduction?, Shannon defines what a tax deduction is, explaining that it helps to lower profits reported to the IRS, and that it is not a direct tax savings.
00:04:50 - What Makes an Expense Deductible?, Shannon explains that expenses must be ordinary and necessary to be deductible, and that they need to have a business purpose that further grows profits.
00:09:03 - The Risks of Deductions, Shannon discusses the risks of taking deductions, highlighting the importance of having a defendable business case and proper documentation, and the need to get a second opinion if a position is deemed aggressive.
00:14:14 - The Importance of Properly Categorizing Deductions, It's important to categorize deductions correctly on tax returns to avoid audits and ensure clear communication with the IRS. Avoid using vague categories like "other" or "miscellaneous" and instead, break down expenses into specific categories.
00:15:32 - The Importance of Defending Business Expenses, Defending business expenses is just as important as understanding what is potentially deductible. Not all expenses are deductible for everyone, and unique expenses need a strong business case for deduction.
00:16:27 - Examples of Deductible Expenses, During COVID, fitness professionals could deduct gym equipment purchases as they were teaching classes from their home gym. However, personal expenses like a Peloton could not be deducted unless they directly relate to the business.
00:17:09 - Join the Keep What You Earn Community, Listeners are encouraged to join the Keep What You Earn community for exclusive content, post questions and chat with other business owners. The community is free and not on Facebook.
00:17:52 - Leave a Rating and Review, Listeners are encouraged to leave a rating and review for the podcast as it goes a long way in getting the message heard by more business owners. Show notes contain links to guest information and ways to contact the host.
Related episodes:
231: Questions You MUST Ask Your Accountant Before Signing a Return
238: Why Your Tax Pro Says No to Creative Strategies
248: How to Take the Home Office Deduction
Resources:
Connect with Shannon:
Attend The CFO Accelerator Live: https://www.thecfoaccelerator.com/shannon
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
