Common sense would tell you that business expenses are the costs you incur to run your business – the money you must spend in order to make money.
The IRS explains it this way:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is appropriate and helpful for your business. An expense does not have to be indispensable to be considered necessary.”
Okay, but what is ordinary to an astrologer? What is necessary to a computer games inventor?
The answer: Anything you do that relates to your work, that stimulates or enhances your business, nurtures your professional creativity, improves your skills, wins you recognition, or increases your chances of making a sale is a business expense and therefore deductible. Yes, anything.
When Anouk Astrologer goes to another astrologer for a reading, that isn’t a personal expense; that’s a business expense, and deductible. It’s just as legitimate a deduction as the cost of a “Learn to Motivate Employees by Role Playing” seminar attended by a salaried middle-management executive.
Ivan Inventor (of computer games, that is) shouldn’t assume that buying a computer game can’t be a business expense. Even if he stayed up half the night having fun with it, he was still researching the competition. The purchase of the game is a business deduction.
If you are self-employed, from this moment on, whenever you reach into your pocket for cash, write a check, or slip out your credit card, be aware that you may be engaging in a business transaction. Change your brain circuits to accommodate this new mindset.
New mindset in place? Good. Now get ready to take a fresh look at three aspects of your indie venture.
1. Define your business as broadly as you honestly can.
The more multi-faceted and inclusive your field of endeavor, the more wide-ranging your expenses – and thereby the less taxes you’ll end up paying.
- A photojournalist can deduct a more extensive variety of expenses than can a wedding photographer.
- A business technological consultant’s expenses will be more diverse than those of a software developer.
- A generalist writer – someone who might write about anything – has more assorted expenses than a sports writer.
2. Look at your activities.
Don’t be so sure that there is a well-marked difference between work and family and play and business chores, or that you know what the difference is. The business life of an employee is rather sharply defined, but your business life as an independent professional is intertwined with your personal life. If your business is broadly defined and your life is richly complicated, it can make for quite a tangle.
If you’re caring for your parents while running a day care business … or are dropping off several of your children at different locations while delivering products to clients … or are struggling to find time for your new independent venture while holding down a full-time job … the interplay of your business and other interests can be intricate. On the other hand, if you’re a loner, without commitments or obligations, the boundary between business life and personal life might be remarkably simple.
- A musician who is single and without children may do very little that is not considered ordinary and necessary to his business. Traveling, purchasing a home entertainment system, attending concerts – that’s about it.
- An alarm-system installer with four children who spends all of his free time going fishing, by himself, is going to have limited business expenses.
- A visual artist who attends a Broadway performance and scrutinizes the sets and costumes can deduct the cost of the ticket.
- A structural engineer who drives through Millionaire’s Mile looking at the period architecture of the houses can deduct the mileage back and forth. This is research for him, so the drive is a business event.
- The proprietor of a shop that sells handmade clothes for children can deduct as a publication expense every magazine she purchases that has any clothing, kids, or fabric industry trends in it.
3. Review your relationship to the people you spend your time with.
Your new mindset expands the way you think about the link between what you do and the people you do it with. Anyone who has a connection with your business may be primarily a business associate – even though in some cases he or she may also happen to be a college classmate, friend, parent, child, or spouse.
Friendship with a business associate is not necessarily fatal to a deduction. You just have to show that the predominant motive for the activity that warranted the expense was business-related.
- A dance instructor calls his friend to invite her to a movie … and to ask her to bring her workbook from the marketing workshop she attended so he can borrow it for ideas for promoting his business. He deducts the business phone call.
- A carpenter enjoys a restaurant meal with her husband, an ad agency employee. During dinner, she talks about her new business, gets his advice on questions of scheduling, picks his brain about various proposals, and tests his reaction to her brochure. It would have been impossible to have this business discussion at the family dinner table with her three children in attendance. So not only does she deduct the expense of dining out, she also deducts the cost of the babysitter.
To sum up, in looking for the best possible advantage regarding business expenses:
- Define your business as broadly as possible.
- Remember that your business expenses may be expanded or limited by the scope of your business, the money available to spend on your business, and the time available due to other commitments.
- Whatever you do, and whomever you do it with, consider the possibility of a business connection.