For small businesses and contractors in the USA, tax time can be daunting. But it might also be an opportunity to get some money back from business expenses. Keeping track of your finances is a key part of running a business and will save you money in the long run.
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It’s worth researching what expenses can be claimed as tax write-offs. Think about things like tools, travel, your car, laptop, phone, or part of your power bill. It might add up to more than you think!
Short on time? Skip ahead!
- 1. What business expenses can I claim as a tax deduction?
- 2. What type of business tax return will I need?
- 3. Common trade business expense categories
- 4. Streamline your expenses through software
- 5. Get organized and get more tax back
1. What business expenses can I claim as a tax deduction?
Taking an employee out for a meal may be covered, but taking them for a game of golf isn’t. Tax categories distinguish how expenses are treated for tax purposes. By understanding these categories you’ll be better set up to make decisions about your business expenses come April.
Business expenses
If a cost is for the benefit of the business and employees, rather than yourself or your home, it’s likely a business expense and tax-deductible.
This can include everything from your tools and equipment, wages for yourself and your employees, advertising, insurance, or the end-of-year Christmas party.
Combined expenses
Some expenses benefit both you and your business, which allows you to claim a percentage back. These expenses can include mileage, car repairs, phone costs, and home office expenses.
Personal expenses
If a cost is not directly related to business income generation and mainly benefits you personally, it’s unlikely you’ll be able to claim it as a tax write-off. From 2023, this also includes private entertainment for business clients and employees, such as sporting events or shows.
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2. What type of business tax return will I need?
Your tax will also be determined by your business type. If you’re a contractor, sole trader, and not earning a salary or wages, you’ll have to file a 1099-NEC form alongside your tax returns. The 1099-NEC form provides more business expense deductions compared to W-2 forms, which employers use to report their employees' wages.
Everyone: Form 1040
This is the individual income tax return form that all individuals, including sole traders and contractors, use to report their total income, including the income reported on Form 1099-NEC, along with any other sources of income. Self-employed individuals, sole proprietors, or single-member LLCs report income or profit through Schedule C, along with Form 1040. Form 1040 is where you calculate your overall tax liability or refund based on your total income and applicable deductions.
Sole traders: Form 1099-NEC
If you are a sole trader or contractor who has received payments of $600 or more for your services during the tax year from a business, that business is required to issue you a Form 1099-NEC. You would use this form to report your income as a non-employee service provider.
Employers: W-2 Form:
If you have employees, you must file and pay certain federal taxes under a W-2 Form that includes Social Security and Medicare taxes, federal income tax withholdings, and federal unemployment tax. You may also need to fill out Form 944 if your annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less, or Form 941 if it is more.
3. Common trade business expense categories
There are lots of ways to claim expenses for your business. The most common business expenses for tradespeople in the US are mileage, car repairs, phone bills, wages and supply costs. Here, we cover each of the ways you can earn your tax back from your business expenses.
📠 Business expenses
- Expenses such as advertising, supplies, and wages paid to employees.
🚗 Car and travel expenses.
Travel
- Deductible travel costs include hotels, airfare, rental cars, and local transportation.
- Travel must be “overnight, away from your residence, and be primarily for business”.
Car expenses
- If your car is often used for business purposes, you can deduct part of your car expenses. This can include repairs, leasing payments, registration, maintenance, and car washes!
- Parking fees and tolls are tax deductible. Parking tickets are not.
- In 2023, the standard mileage deduction is 65.5 cents per mile.
🏥 Medical expenses
- Self-employed individuals and sole traders may deduct medical, dental, and qualifying long-term care insurance premiums, which are limited to the business income.
- Exceptions apply if an employer-subsidized health plan is unavailable.
- Business owners can also deduct employees' health insurance premiums as employee benefit program expenses.
- Deductions are reported on Form 1040.
🖥️ Home office expenses
- Tax breaks for home offices apply mainly to self-employed, gig workers, and contractors.
- If you have a room dedicated as your home office, you can claim $5/sq. ft capping at $1,500. Or, you can claim a percentage of a space used. For example, if your home office is 10% of your living space (aka. the kitchen table), you can deduct that much from the costs of mortgage, rent, utilities and some kinds of insurance. IRS Form 8829 will help you figure out if your home office is eligible.
- You can also claim for supplies, such as a printer, pens and paper.
📱 Phone expenses
- If you use your phone for business, you can claim for the percentage of time you work. For example, if you work for a total of 40 hours per week, and are awake 98 hours per week, you’ll be using your phone for business 41% of the time. That's $41 dollars off every $100 spent on your phone! The same calculation can be used for internet and other shared expenses.
🔨 Work supplies
- Tangible supplies under $200 that do not count as inventory, such as tools, high-vis jackets, and equipment, are deductible as materials and supplies.
💼 Business insurance
- Deductible insurance costs include fire, theft, flood, malpractice, errors and omissions, general liability, and worker's compensation, but exclude auto insurance and personal insurance.
🧰 Depreciation of assets
- Typically, you can depreciate tangible items like buildings, machinery, vehicles, furniture, and equipment. You can also depreciate intangible assets such as patents, copyrights, and computer software as ‘amortization’. Just a heads up, you can't depreciate land though. Complete IRS Form 4562 to take advantage.
- Starting in 2022, expense deduction for depreciation of assets is capped at $1,080,000. Sport utility vehicles have a maximum expense deduction of $27,000.
The dollar limits are subject to change based on IRS regulations
🏫 Memberships and education
- This covers; trade school tuition, subscriptions to trade or technical journals, memberships to construction organizations, unions, and business associations and leagues or licensing fees, including renewals.
🍺 Food, drinks, and entertainment
- Starting from the 2023 tax year, business meals can only be deducted at 50%. Alcohol expenses, including a few beers with a client, can be written off, but extravagant purchases like a $300 bottle of wine may not qualify due to the 'ordinary and necessary' criteria. Few exceptions exist for cases allowing write-offs on meals and entertainment, including charity events, team-building events and the end-of-year party.
🪙 Admin
- You can claim back on admin expenses, including job management software like Tradify. This will relate to any tools or software you use to keep track of your scheduling, taxes, or invoicing.
Always ask your accountant if you are unsure of an expense claim.
4. Streamline your expenses through software
One of the easiest ways to keep track of your business expenses for tax purposes is to pay for all business-related expenses through a business bank account. Keep track of your jobs, invoices, receipts, and mileage logs. You should also keep your receipts digitally, (or within the Tradify App). Save your accountant from a stack of receipts—they’ll thank you for it.
Signing up for accounting software, such as QuickBooks or Xero, will streamline your tax claims and ensure your deductions are legal and valid.
Businesses run better when you and your accountant are on the same page every step of the way. Accounting software gives both yourself and your accountant access to all the same data, helping you file your taxes on time and analyze the figures to make wise business decisions. By connecting your accounting software with Tradify, you can manage your day-to-day jobs in the Tradify app, while your finances sort themselves out in the background.
5. Get organized and get more tax back
Manage your business seamlessly through Tradify's centralized dashboard. With Tradify, you can plan jobs, contractors and supplies, consolidate quotes, invoices, schedules, and receipts, and maintain a direct link with your accountant. Come tax time, you’ll be guaranteed to make the most of your business tax write-offs.
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Tradify syncs up with your accounting software and gets you organized. Sign up for a 14-day free trial or pop over to one of our live walkthrough webinars to see it in action
This article is not intended to be financial advice. Please discuss your individual financial situation with your registered financial advisor, bookkeeper, or accountant.
