As a sole proprietor, you are able to deduct certain business expenses from your overall income. There are certain business expenses that you want to make sure you track carefully because the IRS tends to scrutinize these types of business expenses more closely.

#1 Home Office

One of the biggest expenses for most sole proprietors is their home office. The IRS has set it up so that you can deduct the portion of your bills, such as your energy, internet and even your mortgage, based on the percentage of your home that you use as a home office.

For example, in a 1,000 square foot home, if you use 100 square feet for your home office, you can deduct 10% of the cost of all of your home bills as business expenses.

This requires some really excellent bookkeeping. You are going to need to keep accurate track of all of your home-related bills, and figure out what 10% of each bill is. You are also going to want to make sure that you keep records of all of these bills as well in case you are ever audited.

#2 Office Supplies

Keep careful track of all of your office supplies. For office supplies that you go through quickly, such as paper and ink for your printer, you can deduct the full value of those supplies.

For equipment purchases, you generally can't deduct the full cost of the equipment purchase up front. Equipment purchases or investments, that are designed to last for years, often need to be written off your taxes based on their deprecation value over time.  

#3 Gifts

It is important to understand what is actually considered a business gift. A business gift is something that you give another business or person that you don't personally benefit from. For example, if you "gave" someone tickets to a baseball game as a business gift, but you used one of the tickets for yourself, that would not count as a business gift. To count as a business gift, you cannot partake in the gift itself.

#3 Vehicle

If you travel around in your vehicle for business reasons, you are going to want to keep a travel log. You are going to want to keep track of a variety of information in your travel log. You are going to want to keep track of where you are traveling to and from, as well as why you need to make the trip. For example, are you driving to meet with a potential customer or are you driving to pick up supplies for your business? Be sure to note the reason, as it can be hard to remember the reason for all your trips if your taxes are audited in the future.

Also, be sure to note the starting and ending mileage on your odometer for the trip, as well as calculate the total miles driven.

#4 Meals & Entertainment

Although meals and entertainment can be deducted as personal expenses, they have to specifically be business expenses for them to count. That means that you need to conduct business during the meals and entertainment, and the purpose of the meals and entertainment needs to be to discuss and foster business relationships.

You need to keep a copy of the receipt that went with each meal or ticket that you purchased. You also need to keep notes about who attended each meeting, the purpose of the meeting, and the business matters discussed during the meeting.

#5 Travel

Finally, if you need to travel for business, you are going to want to create a solid paper trail for this expense. Keep track of all the expense elements of the trip, including transportation, lodging, food and event fees. You also need to make sure you write down and account for the business elements of the trip. For example, if you run a glass business and are going to a glass convention in Las Vegas, you are going to want to write down the contacts that you made and the events that you attended. It needs to be clear your trip was about growing your glass business, and not just a reason to visit Las Vegas.

As a sole proprietor, there are lots of expenses that you can write-off on your taxes. However, you need to make sure that all of your expenses are legitimate by keeping good track of them. This will help ensure that you can back-up your business write-offs should you ever be audited by the IRS. For more information, talk with a company like Pharus Group.