I’ve been a sole proprietor for 2 years, and as such I can deduct by small business expenses against my income to maximize my tax deductions on that beautiful little Schedule C.
I’ve been paying estimated taxes all of 2018 and have kept track of my spending in each deductible category using YNAB.
Allowable deductions – business expenses
The tax laws change frequently enough that you need to know what’s an allowable deduction and what doesn’t qualify. It’s helpful to stay on top of this so that you don’t have to deal with an audit.
Unfortunately, the tax language isn’t written for the average consumer. It’s just confusing enough that many are either too afraid to take viable deductions or they pay for expensive CPA’s to handle very simple tax scenarios.
Travel, entertainment, and gifts are common categories which can be confusing. The IRS does a halfway decent job of explaining what is and isn’t an allowable deduction for 2018, especially with the recent TCJA changes.
Investopedia has a nice list of common business expenses which you shouldn’t fail to deduct as a small business owner. It doesn’t matter if you are an LLC or S-corp or sole proprietor – those are simply tax designations. Your business expenses are deductible regardless of your designation.
- Banking fees
- late fees
- account fees
- annual credit card fees
- merchant processing fees (PayPal, Visa, MasterCard)
- Subscription or membership dues
- website services
- Marketing and advertising expenses
- website hosting
- graphic design
- advertising online
- Education and training
- online courses
- books relating to your business
- Contracting out work
- hiring someone to do work for you
- consulting a CPA
- professional photography
- professional videography
- Insurance costs
- health insurance premiums
- business insurance
- part of home insurance on home-office
- Interest fees and costs
- credit card interest used for your business
- business loan expenses
- Office expenses and supplies
- going to fedex
- ordering copies
- Repair and maintenance of equipment or websites
- Office rent
- shared office space
- home office
- cell phone
- part of electricity/water/HOA for home office
- Legal or professional fees
- consulting lawyer for your business
- CPA for your taxes
- financial advisor for your business investments
- consulting a business coach
- cell phone
- bad debt
- certified mail
- Child or dependent care
- babysitting when you’re busy with your business
- Travel expenses
- flying to meet a client
- driving to a conference
- meals (only 50% deductible)
- Business license & fees
- medical license fees
- DEA license fees
- bard recertification fees
- retirement contributions
- solo 401k
Penalties and fines
I paid $5,000 to the Oregon medical board in 2018, is that penalty a business expense? Can I deduct that fine against my income?
There is no straightforward answer.
For example, if you’re a building contractor and you are sued for faulty construction, your legal costs and your the fines you’ll ending paying are tax deductible.
In my case, this is the sort of situation where I’ll be writing it off and explaining it on the IRS form. If they have good reason to say that it’s not accepted, it won’t be the end of the world. I’ll only owe the amount which I saved on taxes plus a small fine.
Home office deduction
I live in a 350 sqft condo and the IRS has a simplified method of deducting home office expenses for telecommuters or those who run their business out of their home.
I get to deduct $5 per square foot, up to 300 sqft – that’s $1,500 I can deduct every year on my schedule A.
This simplifies everything and I don’t have to figure out the percentage of my home:office and apply it to each home expense category – I find this other method rather messy.
Medical sole proprietor
As a physician sole proprietor I earn my money from a combination of healthcare consulting and offering expert medical advice.
To earn this income I need a laptop, cell phone, computer, internet connection, website hosting services, subscriptions, and some office supplies.
Being a sole proprietor medical professional also means that I have to pay for my professional licenses, deal with medical board investigations, lawsuits, pay legal fees, and travel to different states to defend my medical license.
These are common expenses for a medical professional. They would be very similar for an LLC or S-corp.
Tracking business expenses
The easiest way to track business spending is to have a separate bank account and to label each expense so that you have a bookkeeping tally by the end of the year for tax purposes. Even if a CPA is handling your taxes, having all the information available will allow them to get you the maximum tax deduction.
Bookkeeping can be done through Mint.com as well or YNAB or quickbooks.
If you do your own taxes, you’ll be familiar with the categories which Turbotax asks you for to enter for your business expenses. So those are the categories I use to label my spending throughout the year.