Categorizing Your Business Expenses Wrong Can Cost You

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What you don’t know won’t hurt you,” goes the idiom, but in most cases the opposite is true. That’s why I always try to learn as much as I can about as many aspects as possible of what I do, both professionally and in my personal life. When I coach therapists, I use that knowledge to help them build their practices and expand them, price their services well to increase their income, and cut their business expenses.

A therapist I coach was making a couple of mistakes in how she categorizes her business expenses, which would cost her hundreds of dollars a year. Here’s what I suggested she do, which should put a nice chunk of change in her pocket. If you’re making the same mistakes, my advice may do the same for you.

Deducting Business Expenses Saves You Money

This is the part everyone knows. If you spend money for your business, you get to deduct it (in most cases) from your taxable income, which saves you money come tax-time. This includes marketing costs, business meals (50% deductible), operating supplies, and many more.

Categorizing Business Expenses Correctly Saves You More

Growing any business is easiest when you get referrals from other professionals. Referrals are great because they bring in prospective clients without having to deal with our aversion to selling ourselves. Even better, when the referrer is a person the prospect trusts, like their doctor or clergy, it provides a certain built-in trust in you too that doesn’t exist when they simply find you on a Google search or through an ad (in a future article I’ll write specifically on how to build a referral network).

However, getting people to refer their customers/clients/patients to you requires that they trust you first. That requires that you build and maintain a relationship with them. It means you need to do things for them before asking them to do something for you.

One of those things you can do for them is bringing in lunch for their staff, or coffee and donuts, or a fruit basket, or… well, you get the idea, right?

If you categorize these things as business meals, you can only deduct 50% of the cost. If you categorize them as a marketing expense, they’re fully deductible. I recommended that the therapist ask her accountant if the latter is appropriate, since she’s not taking a potential referrer out to lunch where she eats too. She’s paying for food intended only for the potential referrer and his/her staff. If she spends an average of $100 a month on this, her tax savings could be several hundred dollars a year.

Categorizing Mixed-Use Expenses

If you buy supplies like toilet paper, napkins, paper towels, coffee, tea, etc., and use most of them for the office, but take some home, you can only deduct the cost of the part you use for the office.

However, when you buy something that’s not a consumable, where you need it for the office, but can use it for personal purposes without it costing the business anything, you might be able to defend deducting the full cost.

For example, say you spend $500 on a phone system for your office. Just because you make personal calls from the office shouldn’t mean you need to allocate a portion of the $500 as a non-business, non-deductible expense. Note that if you pay for using the system on a per-call or per-minute basis, you shouldn’t deduct the added cost of such non-business use.

I recommended to this therapist to ask her accountant if paying for a cell phone calling plan isn’t the same thing. If the cost of the plan doesn’t depend on usage (most plans these days seem to offer unlimited text, data, and calls included in one fixed monthly price), then perhaps it could be considered a fully deductible expense. If her accountant agrees, the tax savings might put another couple of hundred dollars a year in her pocket.

Bottom Line and Disclaimer

I’m not an accountant or tax professional, and none of the above is intended to be tax advice. The US tax code is very complicated, which is why I always have an accountant help me. It’s why when I coach therapists, I don’t make direct recommendations on tax matters. I only suggest what they should ask their accountants. Similarly, my suggestion here is that you check with your accountant if you should change how you categorize your business expenses, and (legally) pocket an extra few hundred bucks.

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