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The Right Way to Write-Off Business Expenses (Part 1)
PART 1 – TRAVEL EXPENSES AND VEHICLE USAGE
Write-offs can be headache when it comes to preparing income tax returns for your business. They are often what causes a business to be red-flagged by the IRS because there are so many regulations and many small business owners just aren’t sure how to do it right. I will be addressing this in two parts, simply because there are so many different items to cover.
Here are some pointers on how to handle a couple of the most common tax write-offs correctly.
With any travel expenses that you plan to write-off, you will need to be able to prove that the travel was directly related to your business, such as a product convention or meeting with a client.
Flight costs typically aren’t a problem, even if you always fly first class. It’s the limo from the airport to the hotel that would be cause for concern. Meals are deductible at a rate of 50% of the bill. If you are taking client to dinner, you will need to be able to show that you discussed business at the meal.
This is where a journal or electronic log really comes in handy. When traveling on business, be sure to document your daily events, like which clients you spoke to, where and when you met and what you discussed. Should your business ever be audited, the IRS will require you to produce such a journal.
Family vacations are not a tax deduction, unless your family members are part of your business. You have to justify that by holding business meetings or by all parties attending a business convention while on the trip. If you go to the Bahamas and lay on the beach all five days, chances are you really shouldn’t try to write that off.
If a vehicle is used exclusively for your business, then generally you can deduct the entire expenses for operation of the car. However, the standards of “exclusive use” are hard to meet. It’s more likely that your vehicle is used for both personal and business and you will, therefore, have to determine what operation expenses are considered deductible.
Generally, travel between two business destinations is considered a deductible operation of the vehicle. This can mean travel from your home office to the post office to deliver mail or the supply store to get office supplies. This also includes travel from one client’s location to another’s and back to your place of business.
Travel to work locations that are different from that of your regular place of business also count. However, travel from your home to your regular place of business on a daily basis is NOT deductible, even if you have your business advertised on the side of your car.
Generally, travel deductions using a vehicle are calculated by mileage. Again, in your journal, indicate the odometer reading upon departure from a business location and upon arrival at your new business destination. Also indicate how this travel relates to your business.
Part 2: Home Office and Clothing
Related Small Business Buzz Posts:
The Right Way to Write-Off Business Expenses (Part 2)
IRS Audit Triggers
Moving from a Home Office to a Commercial Space
Transitions are Like Remodeling
Building Your Office