What can I write off the most for an online business?
TL;DR
Most ordinary and necessary expenses for an online business are deductible, but it's crucial to differentiate between personal and business expenses to ensure compliance with IRS rules.
Detailed Answer
Expenses such as website hosting, software subscriptions, advertising, and office supplies are generally deductible if they are ordinary (common and accepted in your trade) and necessary (helpful and appropriate for your business). However, personal expenses are not deductible, and mixed-use expenses (e.g., a home internet connection) must be prorated based on business use. For example, if you use your internet 50% for business, you can only deduct 50% of the cost. Additionally, capital expenses like equipment purchases may need to be depreciated over time unless they qualify for Section 179 expensing or bonus depreciation.
Where to Put It on the Tax Form
Schedule C, Line 27a for other expenses, or specific lines for items like advertising (Line 8) and office expenses (Line 18).
Real World Example
A freelance graphic designer who spends $1,200 annually on Adobe Creative Cloud and $600 on website hosting can deduct these as business expenses. If they use their home internet 50% for business, they can deduct half of their $1,000 annual internet bill, totaling $500.
Calculation Required
A calculation is required for this deduction.
To calculate the deductible portion of mixed-use expenses, determine the percentage of time or use that is business-related. For example, if you use your internet 50% for business, multiply the total cost by 0.50 to find the deductible amount.
Audit Risk & Documentation Tips
Moderate audit risk. Keep detailed records, including receipts, invoices, and logs of business use for mixed expenses. Maintain a clear distinction between personal and business expenses, and consider using separate accounts or credit cards for business transactions.
IRS Reference
IRS Publication 535, Business Expenses; IRS Publication 587, Business Use of Your Home.
Can I Write This Off?