Transcription
As an entrepreneur and investor, you have the ability to leverage the tax code unlike the average W2 employee. Because ultimately, governments are incentivized to help investors and entrepreneurs because you help them create more jobs and assets, which helps them collect more tax revenue. And these incentives allow you to write off almost anything. But as we covered, inherent personal expenses that are personal in nature are often disallowed by the IRS unless they meet specific criteria. So, what I want to do in this video is cover some of my favorite personal expenses and when they are considered to be non-deductible as personal expenses and when they are deductible as business expenses because this is going to allow you to maximize your tax deductions.
Let's start with number one. Clothing accessories and uniforms. Clothing items like suits, dresses, shoes, necklaces, even if worn to work or at business meetings, are usually not tax-deductible because they can be worn outside of work for personal use. And the IRS knows if they allowed every entrepreneur to do this, then they would be buying all of their clothing under their business name, right? Even when it's not true. So, typically this is not allowed. However, there are exceptions and this is how you can get around it. So, clothing is tax-deductible. Number one, if it is required for your job like a uniform or branded apparel or number two, it is not suitable for everyday wear like costumes or specialized protective clothing. And so what we've seen in tax law is if your clothing has your brand name on it or your logo on it, then it can be considered to be promotional for your business and therefore is tax-deductible. Or if your clothing is extremely unique and required for some type of performance, then it also can be tax-deductible as a costume. And so you can get creative with this. And one of the things that I like to do is use an embroidery service and add my logo to clothing items, which makes it promotional and a business expense.
Moving on to number two, I have meals. And these are not tax-deductible during your personal time or your daily routines. However, meals can be partially tax-deductible when you are meeting with clients or employees or business partners. Then those meals can be 50% tax-deductible, which is the IRS limit for these kind of meals. As long as the meetings are ordinary and necessary and directly related to your business, then they're tax-deductible. Now, meals can be 100% taxable in a case where you're hosting an event for employees like a holiday party or a company picnic or when the meals are made publicly available, usually for advertising or promotional purposes like having food at a vendor booth. And one of the things I'll talk about is when you have your kids on payroll or you hire or partner with your spouse or good friend, then unlocking this tax deduction becomes a lot easier. And since I partner with a lot of my family members, when we host a birthday party or celebrate a holiday, we often include some business in it as well, so we can write off some of the expenses.
Number three, I have the home office because generally your rent, your mortgage, and your utilities for a home are personal expenses which cannot be business deductions. However, when you use a portion of your home exclusively and regularly for business activities, then you qualify for something called the home office deduction, unlocking your ability to write off a percentage of your home's repairs, maintenance, your rent if you're renting, or your mortgage interest if you own. Property taxes, homeowners or renters insurance, utilities like electricity, water, gas, trash removal, internet and phone services, security services, cleaning services, and other home related expenses. And so, if you have space, it's definitely worth considering adding a home office because it goes well with point number four, commuting.
Because typically when you drive from your home to your primary workplace, this is considered to be personal expenses as commuting miles. However, when you are driving from business location to business location, then those are considered to be tax-deductible business miles. And this is especially useful when you combine it with the vehicle tax deduction, which I'll have a lesson on a little bit later. But anyway, when you have an administrative home office and you travel to another location for business, then unlocking more business miles becomes possible. And these other business locations could be stuff like a second office like a co-working space or going out to make purchases for a business event or business meeting or just meeting with clients, employees, contractors, etc. And so one of the things I like to do is I like to have a primary home office and a co-working space where I also work. But that space also includes a gym, a spa, restaurants, pools, and even a place where I go to get my haircut. And so I'm able to make my drive to that location tax deductible.
Which brings me to number five, the vehicle tax deduction. Many people think you have to buy or lease a new vehicle in order to write it off, but that is not the case. You can use an existing personal vehicle because when you're using a vehicle for business, you can deduct the cost for travel via the mileage or actual expenses that you incur. And the best part is you don't need to register it under your LLC or your business name. The tax code makes this easy. You just need to list the vehicle, the make, the model, and the year and share which miles were used for business and which miles were used personally. That's it.
Then the perks get even better with number six, using your personal phone or internet. Because when you are using your personal phone or internet connection for both business and personal use, then the business use portion is deductible. And of course, if you have a dedicated line for just business, then it is 100% tax-deductible.
Let's move on to something a little bit more edgy. Number seven, personal grooming expenses like haircuts, makeup, skin care, or even spa treatments are almost always considered personal expenses. Even if you think, well, I need to look professional or feel confident in my role, the IRS doesn't see it that way. But there are some exceptions. For example, if you're in an industry where grooming is required for performance, like you're an actor or you're a model or you're an entertainer, those grooming expenses may qualify as business deductions. Or if you're doing something promotional, like you have a very important professional photo shoot coming up or filming for a campaign like a ad shoot or something like that, the grooming cost tied to that event can be tax-deductible. Let me give you an example. If I'm getting my hair or my makeup done specifically for a shoot where I am marketing my business, then those expenses can be classified as part of promotional or advertising expenses for the campaigns, but only if my hair or makeup changes after the shoot is over. Hence, it is only being done strictly for work. And so for me, sometimes I'll add a black spray to enhance my look and then afterwards I'll remove it. I'll leave it up to your imagination on how you might be able to get creative there since everyone's grooming is a little bit different.
Moving on, I have number eight, family travel. Now, this is an area that people tend to get wrong. If you're taking a vacation with your family and you happen to be doing some business while you're there, the travel expenses for you and your family members are considered personal and not tax-deductible. But, and here's the key, when your family members work for your business, if your spouse and your kids are employed under your business, then their travel expenses can be tax-deductible if you're traveling for legitimate business purposes. Here's an example. When I travel to a conference or an event and my spouse comes along and she works for the business and she helps with the scheduling and then the logistics and she's booking things, since she is working during the trip, her travel and my travel becomes a business expense. Now, if you don't work with your family and you happen to be traveling for business, like you're meeting with a client or scouting locations and your family comes along, your travel is still tax-deductible, but your family and their costs are still personal. I'll break this down a little bit more in another lesson, but for now, let's go ahead and move on to number nine, gym memberships.
Now, gym memberships and fitness costs are often another area where entrepreneurs think, well, if I'm meeting with my client or my employee while we're working out, then it must be tax-deductible, right? Well, that's another area that the IRS considers to be inherent personal expenses. That being said, there are a few ways to make this an actual business expense. Of course, if you own a gym or you run a fitness related business, then those membership fees and gym equipment can be considered to be business expenses. Or if you happen to have a co-working space that includes the gym membership as part of the membership fees, then of course it becomes a business expense because it's tied to the primary purpose of business. And finally, if you offer gym memberships as part of an employee benefit package, then those costs are deductible as employee benefits and you can be an employee as well. And so for me, once again, I work at a co-working space that includes gym access. And since my primary reason for the membership is the work space, the expense is deductible and I get to enjoy the gym as a bonus or extra perk.
So there you have it. Almost every personal expense that I can think of from the clothing on your back to the food on your table. All right, now I covered a lot of the highlights, but there are definitely some technicalities that come into play when using some of these tax deductions. So, coming up next, we'll do a deeper dive into some more tax write-offs.