One of the best parts about working for yourself is your business expense write-offs.
Meals, some travel, and even client gifts are tax deductible!
But as any responsible CPA will tell you, you need to know if and when these expenses can be deducted.
What are Business Write-Offs?
It costs money to start and maintain a business. And if you're doing business the right way, you'll start spending more every year to help your company grow.
This is where write-offs come into play. A business write-off (also called a business expense) is anything "ordinary" or "necessary" to run your company.
Here's how the IRS defines these two terms:
- Ordinary Expense: One that is common and accepted in your industry.
- Necessary Expense: One that is helpful and appropriate for your trade or business.
Let's say you're a real estate agent. An ordinary expense would be business cards and other marketing materials, accounting software, and closing gifts.
Necessary expenses for a real estate agent would be gas (determined by mileage), rental space, and signage.
Why Your Business Needs Expenses
Let's say you make $10,000 per month in gross revenue. Generally, you want to save 30% of your monthly income for taxes. That brings your net income to $7,000 per month.
With business write-offs, you can start spending more money on your business while paying less in taxes.
Let's look at a monthly example:
Gross income: $10K
- Expense #1 Digital tools (automation services, Quickbooks, etc.): $500
- Expense #2 Outsourcing work: $2K
- Expense #3 Client gifts: $200
- Expense #4 Travel: $500
- Taxes: 30% (or $2,040)
- Total Net Income: $4,760/month
By putting money into your business— whether it's to save time by outsourcing or marketing your business with client gifts— you pay $1,000 less in taxes.
More money to scale your business and less for the government? It's a pretty sweet deal!
Are Client Gifts Tax Deductible?
The problem with these expenses is that people don't know how many things— or how much— they can write off.
For example, client gifts are tax deductible. That's right, you can get your client a luxury gift to remember you by just so you can owe less in taxes by the end of the year. A client gift can be considered an "ordinary expense" because it's a standard way to market your business.
Here's the catch: only $25 per client gift is tax deductible.
"You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year."
What Types of Gifts are Considered Tax Deductible?
According to the IRS, "The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule." These exceptions include gifts to political parties, churches, or contributions to your spouse.
They also say that a gift that could be considered entertainment (such as a movie or sports game ticket) is considered entertainment and can't be deducted.
This is why you must keep vigilant records of any gifts you give and how much they cost.
Let's say you use our Virtual Party Box to send gifts to each client you sign. In your files, you want to label each gift individually with the name, business, and amount spent on each client.
So, if you're signing on 4 clients a month, that's $100 per month! That means you're getting $1,200 in tax deductions every year just from client gifts!
Just think of the possibilities!Ready to add client gifts to your company expenses? Our done-for-you Virtual Party Box lets you send presents to people all over the country!