For some reason quite a few of my friends have been turning to me for help with their taxes, most of whom have generated some sort of income through the internet. I find this kind of funny since I’m not an accountant (although my mother is and I have some experience as well) and I don’t trust myself to do my taxes myself and instead allow someone else to do them so any mistakes can be caught quickly. However, since the recurring question that I am asked is about possible business expenses, I thought I’d write a quick (but hopefully helpful) post to give others some help in getting their expenses for the 2009 year in order, and to make keeping track of expenses in the years to come easier as well.

When it comes down to business expenses, it’s important to remember that just because you could take it as an expense doesn’t necessarily mean that you should. I’ve seen some other posts around on blogs where folks recommend their readers take XYZ as an expense without explaining that said expense likely wouldn’t be applicable to them, or explaining the stipulations that go with that expense. I cringe when I see those posts and read comments from readers exclaiming how they’re going to take those expenses too. I can’t help but get visions of auditors cackling madly and rubbing their hands together. If you don’t have any need of project management software don’t go and buy it and then take it as expense because a fellow blogger said you could. I’ve sat in on auditors going through client’s books before, believe me, they will find the frivolous expenses and if you can’t prove that you use them, they will be removed. Don’t hand them [IRS] a ripe chance to slap you with penalties and fees on a silver platter folks, instead CYA.

That said, below is a list of common business expenses one could take if their business/source of income is generated through the internet and is blog/website related. Bloggers, Ad-users (ie: Adsense), writers, and graphic and/or web designers will likely find these most helpful:

WEB SERVICES – In order to keep your site up and running you have to have it hosted, and more like than not, you have a domain (or more) as well. Whether your site serves as your portfolio or hosts ads that you earn revenue from, it’s an integral part of how you earn that income and is an expense you need to be keeping track of.
Examples: Hosting, Domain Purchases/Renewals, File Storage, ect.

ADVERTISING – In order to generate or up your revenue you have to get yourself out there and get yourself known. Advertising is a trying but much needed expense for everyone.
Examples: Items purchased for giveaways/contests, ads, paid for graphics for advertising (say you pay a G.A. to make you some banners and headers), business cards, printing fliers.

SOFTWARE – It actually never ceases to amaze me how many people will shell out large amounts of cash to get the latest versions of their favorite software and then completely forget (or just don’t realize) that it can be taken as a business expense as well. If you purchase software that is going to be used for your site then it is a prime expense to take. Other software that can be taken as an expense are programs that help maintain your computer, because let’s face it, without your computer you’re sunk. Basically, if it’s a program that helps or enables you to make money it is an expense.
Examples: FTP programs, graphic programs like Adobe Photoshop, Dragon Naturally Speaking, website builders, Microsoft Office, virus protection, registry repairers, adware and malware protection, ect.

INTERNET & PHONE SERVICE – Let’s face it, if you didn’t have the internet you wouldn’t be able to get your work done. This is a very important expense. But it’s a tricky expense to take too. What I’ve seen a lot of bloggers fail to mention (and even some tax preparers too) is that unless the internet is solely for business purposes (and very occasionally personal) you should not be taking the entire bill as a business expense. The same goes for your phone bill as well. If you have a separate phone line or ISP for business purposes, then you can take those bills in full. If your phone and internet is split between personal and business then you can only take a percentage of the bill for business. Sit down and calculate how much of your bill is used for personal and how much is used for business, then take that percentage for the total cost of bill for the year and you have your expense. I recommend sitting down with a tax preparer and working this out together.
Examples: phone bills, internet bills, cable

ELECTRONICS/TECHNOLOGY – Because, let’s face it, without your computer and various pieces of tech, you’d be sunk. While people are quick to remember that desktops and laptops are expenses, they tend to forget there are smaller items that are integral to their business as well. From new mice, to printers, faxes, and even PDAs – these are items you use to get your work done and can cost a pretty penny to boot. Don’t forget these! Bloggers, it is important to note that content is key, if you use a digital camera to take pictures and use those in posts then the camera is a business expense, don’t let others tell you otherwise.
Examples: Printers, computers, CPUs, mice, speakers, digital cameras, microphones, laptops, laptop battery chargers, usb cords, thumb drives, laptop batteries, cooling pads, tablets

ELECTRICITY – Yes, it is important that you have electricity running in order to turn on your devices and get some work done. So of course this is an obvious expense to take. Here’s the thing people seem to forget to mention, like the telephone and internet, you need to prove that the electricity bill you’re deducting is a business expense. If you have your own little office somewhere and pay a separate electricity bill to power it, then you’re good to go. But if, like most, you’re working from home then there are a few more steps you need to do. First you need to establish an office space where you do the majority of your work from, then you need to take the dimensions of this space down. From there you can calculate the percentage of the electricity that is used to “power” your office. Different states also have different stipulations with regards to this, I strongly recommend you sit down with a tax preparer and work this out together.

REPAIRS & MAINTENANCE – Let’s say that despite having the latest in virus protection your computer still managed to get a trojan and it went balls up. Hey, it happens to everyone. Or maybe you just had an accident and the laptop took an unfortunate tumble. Getting your computer back up and running is no doubt a priority and no doubt it’s gonna cost you. Luckily, the money you shell out on getting it repaired (or just recovering files from an otherwise unsalvageable piece of…tech) can be deducted as a business expense too. Likewise, the same can be said for other electronic devices you might use in conjunction with your business, say cameras, PDA’s, phones, ect. At least there’s a bright side to that otherwise bad day.
Examples: computer repair, maintenance, data recovery, ect.

MILEAGE & GAS – If your business has you taking trips to pick up supplies, visit clients, or running other errands you should be keeping a mileage log and recording it all down. Even if only a small percentage of the mileage on your car is business related, every little bit helps! A good mileage log consists of the following for each entry: Date, Mileage Start, Mileage Stop, Destination/Purpose, and it should be noted whether the trip was business or personal. For personal entries it is not required that you mark down the destination and purpose. For business entries you had better fill out the entry in its entirety. You can also keep gas receipts and deduct that instead. The rule is one or the other, not both, however, and unless you do a hell of a lot of driving for your business I recommend going the mileage route. Otherwise you’re stuck calculating just how much of the gas you purchased really was used for business purposes, and even then, you need to keep the mileage log. Again, things can vary state to state so talk this over with your tax preparer!
Examples of business “trips”: buying supplies, dropping off electronic devices for repairs, meeting new clients, driving around to gather photos for blog posts (content!), utilizing hotspots to do work in lieu of home/office, driving to seminars (for those who attend conferences and seminars like BlogHer), ect.

STATIONARY – Probably the easiest expense to get and also the most over looked too. If you’re jotting things down with pens, using stick notes to remind you of important business-related events, keeping track of important dates and deadlines in a calender then you’re purchasing these things and should be deducting them as business expenses. Don’t just shrug your shoulders toss that receipt away, these expenses may be small in comparison to others, but they are expenses and they add up.
Examples: note pads, stickies, pens, markers, calenders, printing paper, white out, tape (tape dispensers) staples and staplers, ect.

OFFICE SUPPLIES – Like stationary, these items also get over looked and shrugged off unless they’re some of the bigger items (like desks). Lets face it folks, you need these supplies to get your work done and maintain your “office”. Don’t forget them!
Examples: desks, office chairs, air cans, screen wipes, desk polish, book cases and shelves, mouse pads, burnable CD and DVDs, USB and thumb drives, business card holders, pen holders, ect.

RESOURCES & EDUCATION – And here is yet another expense that get over looked a lot. Are you attending a seminar or convention in order to pick up some tips and tricks from others successful in your field? Maybe you’ve purchased some books and manuals to help better your own skills (Wordpress for Dummies anyone?), hell, maybe you’re taking a class on MYSQL and PHP to get a leg up. Well guess what, those are out of pocket expenses you should be deducting. Classes fall under “furthering education” as do manuals, books, seminars, and conventions that teach you anything that will help your business stay current and succeed.
Examples: books, manuals, convention/seminar fees, classes

FOOD & DINNING – If you’re meeting with clients over breakfast/lunch/dinner, sitting down to a meal out somewhere with an advisor, or taking a meal at a seminar, you better be keeping those receipts. You should also be keeping a meals and entertainment log too. For each entry you should mark down the date, who you ate with (if applicable), a quick notation as to why this meal was business-related (were you paying for your own meal at a Blog Her convention or eating out with a new client?), and the amount spent. You can only take 50% of meals (sadly) but something is better then nothing. Keep those receipts!
Examples: meals with clients, convention meals, ect.

OFFICE FOOD – This is a tricky one, and one I tend to avoid taking for the most part myself. If you have an actual office space that is separate (not attached to your home) and clients who can come in to speak with you, then you might have a candy dish sitting around, perhaps you even keep coffee and tea stocked just for your clients or for those nights you’re working late into the night. In those instances, items such as the aforementioned might be taken as an “office expense” and you may take the full amount. If you have an office in your home or a designated space, regardless of whether or not clients come in and the snacks are for them, you should be taking this expense under dinning and only taking 50% of the amount. Why? Because your “office” is part of your home and snacks are eaten in your home regularly. You cannot rightfully “prove” that those snacks were solely for business purposes and if you are audited you can bet you will not be allowed that expense in full. Even then, despite what other bloggers seem to be encouraging, this is a very iffy expense and I don’t recommend taking it. Remember, the burden of proof is on the tax payer.
Examples: candy (for candy dishes), coffee, tea, small snacks

Things to Keep In Mind!

Some other things that you should keep in mind, when it comes to expenses, is that having logs (whether they’re required or nor) are very helpful and will help you track (and justify) expenses should you ever be audited. Keep you receipts! If you’re claiming an expense you better have a receipt for it, whether it’s an invoice printed from the computer, bank/credit card statement, an email, or receipt form a register – keep it. While keeping the original receipts is all well and good, the fact is, receipts fade with time. Especially those printed on thermal paper. For this reason you should always make photo copies of your receipts. Thermal receipts can fade away to nothing in months, and if you’re audited a year or two down the road, chances are most of your receipts will be faded. In those instances, if you do not have proof of the expense you will not be able to take the expense which will obviously result in your tax return being rendered incorrect.

Auditors are people too, and they’ve got heavy workloads with defensive and argumentative people to deal with. If you ever get audited, do not make their jobs harder by handing them a large box filled with tax returns, receipts, and other odds and ends tossed together and expect them to solve it. Keep your information neat and together. Your tax return should retain all the relevant information for that year including W2’s and 1099’s and be stored in a file folder nice and neat with your expenses and logs in a separate but included file. Expenses should all be photocopied and stored in a folder that is for that tax year’s expenses only. Included should be any logs that you might have that explain the expenses, such as a Meals & Entertainment Log, Mileage Log, and so forth. It’s also helpful if you highlight the portions of an invoice or receipt that contain the items that were purchased as an expense or contain the total amount if the entire invoice was a business expense. Some invoices are confusing or hard to understand, help your auditor out and make things easier for them. Not only will things go smoother, but they’ll be in a better mood for it and will be more understanding and likely to assist you.