If you've seen me around in the Facebook groups, you have probably seen me say "allowable expenses" or similar, but, what are allowable expenses?
Not Such Good Advice
There are many 'coaches' out there who will tell you to claim all sorts of things as expenses. Clothing, makeup, nails, hair, etc. These are typically not a business expense. Wait, don't they link the IRS publication? Well, yes, but they also haven't read it in full because the publication will state that, for example, clothing can only be an expense if it is a uniform. That is, it cannot be used/worn outside of the job.
Why Can't I Take Those?
Well, you could. I won't stop you, but I will say this. You must always ask yourself if what you are about to write off as an expense is Ordinary and Necessary in your industry. That is, do other similar businesses usually have this as an expense? Does this particular expense have to be made in order for your business to function?
Everything you choose to count as an expense is something that you have to be prepared to argue with an auditor as to why it should remain an allowable expense. If the auditor doesn't agree with the case you've attempted to make, they will 'disallow' the expense and you will be responsible for paying that amount back (and possibly fees).
Then What Can I Take?
This is where we work through the Schedule C and put everything into a category based on what the item is. Then, as you are preparing to include the expense, ask yourself if it was ordinary or necessary?
Go through the Schedule C. Make sure you have a copy in front of you. Pull the instructions out too.
Skip over to inventory. Inventory is not an expense until it has left your business either by way of sale or trash. The final number that you get on Line 42 will go in the Income section on Line 4 as your very first expense.
Now, Part II, this is where all of the expenses go and this is how we are going to decide what is allowable. Be honest and keep in mind, Ordinary and Necessary.
What is a business deduction
Advertising: Business Cards, Logo work, ads - Not a makeup artist so you can take photos
Depreciation: Equipment, total year's amount of patterns & SGV files, IP registrations
Insurance: Liability, Employee, E&O, etc. - Not Car, Life, or House
Legal & Professional Services: Attorney, compliance consultation, tax consultation, compliance manager, virtual assistant, IP attorney services
Office Expense: Software Subscriptions, postage (if you *don't* normally ship things) - Not a Netflix or Spotify subscription
Supplies: Items reasonably used up within a year of purchase *and* does not go into your final product. Unbranded packaging, pens, backdrops, signage, fabric swatch samples.
Taxes & Licenses: State sales tax already paid, business license & renewals
Other Expenses: Website fees, Payment processing fees, craft fair booth fees, membership fees, postage
Other things NOT an expense for your business
Donations: In general, this is only a personal donation that will go on the Schedule A (if you have a receipt from a registered 501(c)(3).
Childcare: This is a personal expense.
Credit Card/Loan Payments: You've already accounted for this when it was first purchased, but you can possibly take the interest.
Business Use of Home: This is a specific calculation for an area of the home used exclusively for business. If audited and there is something personal in the space, an auditor can disallow this and go back to every year you've taken it. If you cannot guarantee that the space will remain exclusive, do not take this.
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Check out these products to help your journey.
- The Basics of Starting a Business digital book
- The Makers Community
- The Makers' Right-Hand Business Binder
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