Learning about tax deductions can be intimidating and let’s just say it- kinda boring. You’ve probably heard about how you can “write it off”, but what does that even mean?
Tax write-offs, also known as tax deductions, are business expenses that you can deduct from your gross income on your taxes. The importance of deductions is that they significantly lower your taxable income, which means you pay less at tax time.
So what can you deduct? So many things!
Here’s a list of the 12 most common tax deductions for online business owners:
#1. Advertising Costs:
Advertising is the parent category for some juicy sub-categories that online business owners spend a lot of dollars on.
Here are the two places business owners will have a lot of deductions:
Marketing: Marketing includes obvious marketing costs like Facebook Ads, Google Ads, and print ads.
Email: The less obvious costs are your email provider (Mailchimp, Convertkit, Mailerlite, Infusionsoft) and services you use to schedule your social media (Buffer, Meet Edgar, Hootsuite, etc.).
Oooooohhh. So.Many.Deductions. This is everything that relates to your website like domain names, hosting, plugins, stock photography, graphics, and subscription website services like Shopify and Squarespace.
When it comes to your website costs, don’t forget about other subscription or hosting services that host your sales and course pages, like Lead Pages and Teachable.
#3. Cell Phone:
One of the most commonly missed deductions for online business owners is a portion of their cell phone bill. If you use your cell phone for business, then you can write off a percentage of your bill based on how much you use it for business. Most online business owners write off 50 -70% of their bill.
A point of caution here- unless you have a cell phone that is exclusively for business, don’t write off 100%. That raises red flags and looks suspicious.
I don’t know about you, but I love online courses. And what I love even more about them is that I can write them off. Yup- all those online courses, masterminds, webinars, and in-person courses you’ve taken are tax deductible.
Keep in mind that the course has to relate to your business. If you write a blog about DIY home repairs and take a landscaping course, that totally relates. If you’re me and write about finance, a landscaping course is a stretch.
While you want your education costs to relate to your business, they don’t need to be directly related to your industry. Courses on building a blog, launching a course, list building, social media and marketing would all be considered legit business costs for online business owners.
#5. Home Office:
If you work from home then you may qualify for a home office deduction which means you can write off a percentage of your rent or mortgage. The IRS stipulates that a home office must be used exclusively and regularly for business use. This means that your home office must be a separate room in your home that you use only for business activities and you must use this room on a regular basis.
Dining room tables, desks in the family room, and working on the couch don’t count as a home office space because you also use the space personally. Regularity implies that you use your space daily or weekly. If you use your spare bedroom once to host a meeting, that wouldn’t count as regular use.
Desks, office chairs, filing cabinets, etc. that you buy for your home office are 100% deductible. If you buy a computer and use it exclusively for your business, then you can write off the entire purchase. If you use it for mixed personal and business use, then you can write off the percentage that is used for business.
If you plan on taking a home office deduction, consult a CPA about if you qualify and how much of your rent or mortgage you can write off. They will also advise you on what percentage to take off of your indirect home expenses, like water, gas, electric, and cleaning.
Writing off your in-home internet works the same ways as writing off your cell phone bill. You can write off a percentage based on how much you use your home internet for business. Like the cell phone bill, don’t write off 100% unless you are writing off the internet that is in an office outside of your home.
Don’t forget that you can write off the internet access that you purchase on a plane! Most people forget about this, but if you use it to do work related to your business, it is deductible.
#8. Merchant Processing Fees:
Merchant processing fees are a fancy way of saying credit card processing fees. This is the 2.5-4% that Stripe, Square, PayPal, and other processors charge you.
A common mistake for online business owners is that, instead of taking the small fee as an expense, they log their net sale (the amount they receive after the fee) as their gross income.
Let’s break that down. You sell a $100 product and Stripe charges you 2.9% ($2.90). You receive a deposit of $97.10. Many people just call $97.10 their income, but their income is $100. The deductible expense is $2.90 and your net taxable income is $97.10. This is the proper way to track and record merchant processing fees.
#9. Office Supplies:
Office supplies are everyday supplies that you need to run your business. These tend to be small, inexpensive items that wear out or are used up over time. Printer ink, notebooks, pens, printer paper, file folders, labels, envelopes, and postage all fall under this category.
#10. Photography & Videography Equipment:
If you purchased photography or videography equipment for your online business you can write it off! Depending on the cost and type of equipment, it will either be considered an expense or an asset.
Generally, smaller ticket items (under $2k) are considered expenses while larger equipment are assets. In either case, be sure you keep track of what you purchased and consult your tax professional.
When writing off photography and videography equipment, don’t limit yourself to just the camera and lens. Supplementary equipment like lighting, tripods, filters and camera bags are all deductible, as well as service or repairs you get for your equipment.
Software comes in all shapes and sizes and, if you use it for your business, it’s deductible. Software isn’t limited to applications you buy for your computer. You can also write off apps and subscription service software.
Common examples are QuickBooks (desktop and online), Photoshop, Microsoft Office, Evernote, Google Apps, Canva, and Dropbox.
Many online business owners hire contractors to help them with graphic design, photography, web development, bookkeeping, and general office assistance (like a virtual assistant).
Everything you pay to these contractors is deductible!
If you’re deducting subcontractor expenses, you’re required to file a 1099 for anyone that you pay more than $600 to in a tax year.
Filing a 1099 sounds really intimidating but it’s easy – I promise. The first step is, any time you hire a contractor, send them a W-9 form (which you can get online as a fillable PDF). A completed W-9 contains all the information that you need to file a 1099.
At the end of the year calculate the total that you’ve paid the contractor for that tax year. This information will go in Box 7 (Nonemployee compensation) of the return.
Then, before January 31st (this is the deadline) go to a 1099 online filing service (like 1099online.com) and file an electronic 1099. The service will mail your return to the contractor and to the federal and state government and costs less than $5 and return. And that’s it!
I hope this post helped you get a better understanding of your deductions, especially as an online business owner!
Every business is different and it’s important to consult a tax professional before doing your taxes. When in doubt, track it, and bring your questions to your tax professional.
For a complete list of small business deductions, check out The Epic Cheat Sheet to Deductions for Self-Employed Rockstars
About The Author:
Andi Smiles is a professional bookkeeper and small business consultant. She has a passion for helping small business owners develop a transparent and loving relationship with their finances and blogs about solopreneur finance at the BFF course. You can also get other juicy tidbits by following her on Instagram, Twitter, Facebook, and Pinterest.