SmallBizResource Blog -- SmallBizResource

9 Hard-To-Classify Business Deductions

Posted by Gayle Kesten Friday, Mar 13, 2009, 03:02 PM ET

In the post preceding this one by less than an hour, I told you about accounting software developed specifically for the self-employed.

Outright's creators, Kevin Reeth and Ben Curren, also sent me a helpful compilation of what their users have found to be among the most difficult-to-classify business deductions and their resolutions. Each one of the following nine conundrums are followed by the options you might consider, which one you should pick, and why:

1. Business cards
When you first hang out your shingle, you might head down to the local printer to get some business cards made up. But what kind of expense is that?

Which do I choose: Supplies, Legal & Professional Services, or Advertising?

Recommendation: Advertising
As a self-employed individual, odds are your business cards will be given out to prospective customers in an effort to generate revenue. For this reason, the most appropriate category would be Advertising.

2. Web site hosting
You pay a monthly hosting fee to firms like GoDaddy or DreamHost. But does that go under equipment rental? Office expense?

Which do I choose: Advertising, Utilities, Equipment Rental, or Office expense?

Recommendation: Advertising or Utilities
According to Jeanné, this expense is similar to business cards in that it is likely used to help attract customers and drive revenue. However, Cheryl sees it a bit differently: "Web Hosting is a service, and with a detailed P&L you would list it as Service Provider, but on a simple P&L you will list it as a Utility."

3. Stock photos/icons (and other digital media)

Which do I choose: Cost of Goods Sold, Office Expense, Supplies, or Legal & Professional Services?

Recommendation: Cost of Goods Sold, Advertising, or Supplies
In this case, it depends on how the items are used. As Cheryl explains, "A Web designer or graphic company that has signed up for unlimited access to stock photos available online would expense the monthly or quarterly fee to supplies for Cost of Goods Sold." However, in the case where the images are being used for your business Web site, "you could easily classify the expense as Advertising or Supplies," says Jeanné.

4. Getting a DBA/fictitious name
You're now in business for yourself, so you get a super cool name to use. How do you treat the costs of doing that?

Which do I choose: Taxes & Licenses or Legal & Professional Services?

Recommendation: Both, unless you file everything yourself
According to Cheryl: "Formation Fees should be broken into two categories: The portion of the fee that is paid to the state and the annual renewal fee should be recorded as taxes & licenses and the portion of the fee that is for professional services provided should be classified as legal & professional fees if you contracted a licensed professional to complete your formation documents."

5. Payments to Web designers (and other contractors)
How do you treat the graphic designer who created the look and feel for your Web site?

Which do I choose: Legal & Professional Services or Contract Labor?

Recommendation: Contract Labor
"Professional services is generally used only for legal, accounting/tax/payroll and business consultancy," says Jeanné. Better to use Contract Labor -- and "be sure to get a completed W-9 so you can send 1099s where appropriate."

6. Desktop software
You fork over the money to purchase the latest version of Adobe's CS4.

Which do I choose: Supplies? Office Expense? Depreciation/Section 179?

Recommendation: Depreciation/Section 179
As Cheryl states, "Software purchases are a depreciable item unless the program has a useful life of less than one year. In most cases you would not replace your software each year so it should be listed as a depreciable item."

7. Web-based software subscriptions
Being the fan of Web-based software that you are, you have monthly subscriptions to FreshBooks for your invoicing and Basecamp for your project management. But where do those expenses go?

Which do I choose: Utilities, Office Expense, or Taxes & Licenses?

Recommendation: Utilities or Office Expense
Here we get different opinions. For Cheryl, "In a simple set of books I would classify payments to a Web Services Provider to utilities as you are utilizing their program." However, Jeanné recommends placing them under Office Expense.

8. Postage
There are still times when you have to send this by snail mail. And that does in fact cost money.

Which do I choose: Supplies, Office Expense, or Other Expense?

Recommendation: Office Expense if small, Other Expenses if significant
According to Jeanné, you would place the costs under "Office Expense if it is a few rolls of stamps or the postage meter for letters." However, for large shipping costs, place them under Other Expenses.

9. Coffee machine, coffee, and filters
You need your caffeine, we know. But what kind of deduction is that?

Which do I choose: Supplies or Office Expense?

Recommendation: Office Expense
"Office Supplies are physical widgets and stuff you use up (paper clips, pens, sticky notes, toner, legal pads, thumb drives, computer supplies, planners and calendars, etc)," says Jeanné. "Office expense might be more substantial or service related (janitorial supplies, cleaning service, coffee supplier, water cooler, etc.)"

Bonus expenses: Using the "other expenses" category
The following are very common self-employed expenses that should be placed under the "other expenses" category:

• Bank/ATM fees
  
• Survey and research costs
  
• Professional "How To" Books (Web design, programming, etc.)

  
  

  SmallBizResource

  
  
  
  
  This is a public forum. CMP Media and its affiliates are not responsible for and do not control what is posted herein. CMP Media makes no warranties or guarantees concerning any advice dispensed by its staff members or readers.
  
  Community standards in this comment area do not permit hate language, excessive profanity, or other patently offensive language. Please be aware that all information posted to this comment area becomes the property of CMP Media LLC and may be edited and republished in print or electronic format as outlined in CMP Media's Terms of Service.
  
  Important Note: This comment area is NOT intended for commercial messages or solicitations of business.