What Qualifies as a Legitimate Tax Deduction?

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Hi Reader,

Although I’m not a tax preparer or tax attorney, I am quite familiar with the IRS tax rules for small business owners, thanks to years of running a bookkeeping business and filing my own small business taxes.

Everywhere I look, I see internet “tax hacks” dishing out bad advice—advice they often want you to pay for! Do you think these hack-gurus will reimburse you for penalties and interest if you take their advice and then get audited by the IRS? No way!

No one wants to pay taxes, and you absolutely should take every legitimate tax deduction you can. But I’m also a firm believer that you should be a good citizen, pay what you owe, and not take deductions you know are bogus. It’s just wrong, and it can catch up with you in a not-so-nice way.

So here is some of the small business bad tax advice I unfortunately see all the time:

Reality Check: Breaking Down Popular Tax Deduction Myths

Myth: “Start an LLC and everything becomes a write-off (just keep the receipts).”
​Reality: Entity type + receipts don’t create deductions. Expenses still have to be ordinary and necessary for your business.

Myth: “Put your kids on payroll to avoid taxes.”
​Reality: You can pay your kids as employees of your business, but they have to do legitimate work, for reasonable pay, with time tracked and proper payroll compliance. If you wouldn’t pay someone else to do the work at the rate you’re paying your kid, it’s not legit.

Myth: “If you talk business on a trip, the whole trip is deductible.”
​Reality: Travel rules are strict; a business conversation doesn’t magically turn a vacation into a write-off. It comes down to substance: if the trip was primarily personal, one business meeting doesn’t make it a business trip.

Myth: “Meals are 100% deductible if you talk business.”
​Reality: Nope. A classic misuse is a husband-and-wife business team going out to dinner, bringing up business, and deducting the meal. The IRS is going to view that as a personal meal. A business meal still must be ordinary and necessary, and meeting with a client can help substantiate that claim, but a meal with your spouse usually won’t. Most business meals are only 50% deductible and require solid who/what/where/why documentation.

Myth: “Write off your car as a business expense.”
​Reality: True story: a former client with a fully online, work-from-home business making less than $10k/year tried to deduct the full cost of her new Tesla. I disengaged. Vehicle deductions hinge on business-use % proven by a mileage log (contemporaneous tracking). How much are you really using that vehicle for a fully online business? Don’t cheat, folks. But do track your business mileage in your personal vehicle and take the mileage deduction you’re entitled to.

Myth: “Deduct clothes/hair/makeup because you’re the brand.”
​Reality: These are personal expenses and should not be deducted. It doesn’t matter if you’re on camera. It doesn’t matter if you “need” a spa day to relax so you can run your business. It doesn’t matter if you “need” a gym membership to stay healthy to run your business. These are personal expenses that won’t fly with the IRS as business deductions.

Myth: “You don’t need to report income if you didn’t get a 1099.”
​Reality: You report all taxable income, whether or not a form is issued. There is no “minimum threshold” where you can just skip reporting income to the IRS.

Myth: “Deduct your full phone, internet, or utilities because you work from home.”
​Reality: Generally, you can only deduct the business-use portion, and the home office deduction may apply to part of those costs. Think of it this way: would you really not have a cell phone if you weren’t a business owner? Would you really not pay for internet if you weren’t a business owner? Of course not. That means these are personal expenses first, and if you want to deduct part of your phone or internet, you’d better have good documentation showing personal use vs. business use.

Myth: “Just 1099 everyone and payroll rules don’t apply.”
​Reality: Misclassification can trigger back taxes, penalties, and a mess. I get it. It’s easier and cheaper to hire everyone as a contractor. But if you actually read the IRS worker classification rules, I think you’ll find a lot more people fall on the employee side than you’d expect. Before you hire, read this post I wrote that explains employee vs. contractor rules.

Etsy and Blogging Taxes Made Simple

Sponsorship

I’ve written several easy-to-read guides that walk small business owners through the ins and outs of taxes. They’re written in plain language (no tax-speak), so you can actually follow along and apply them.

My first guide was created for bloggers, because blog income can get confusing fast, especially when hobbies like cooking or home DIY blur the line between personal and business.

These are quick reads, and if your library offers Hoopla, you may be able to check them out digitally.

Small Business Updates

Tax Deductions Toolkit

Want to make sure you get all of the legitimate tax deductions you can? You might want to get my Tax Cheat Sheet Ultimate Tax Deductions Toolkit.

Tax Deduction Case Study

A real-life case of a business owner thinking he could be lax with his deduction support. His deductions were thrown out, and he was left with an additional 20% penalty.

Etsy Discount Policy

Etsy put out a seller handbook warning about truthful advertising and discount practices. Honestly, the discount part feels a little heavy-handed as Etsy itself seems to have pushed the discount mindset onto buyers with their practice of highlighting discounts in the search feed.

On a Personal Note

I used ChatGPT to help fix my broken oven! Our oven was overheating, and before I called an appliance repair person, I decided to see what ChatGPT thought.

After a series of questions, I was able to narrow it down: if it were a faulty temperature sensor, it would be an easy DIY fix. If it were anything else, we’d probably need a professional.

My husband and I worked with ChatGPT to diagnose the problem, and the next day, I went to an appliance parts store where they had the sensor in stock for $35. When I got home, I decided to surprise my husband by replacing it before he got home from work. It worked! I must admit, I was pretty proud of myself. Have you ever used ChatGPT to help with a repair like that?

Talk soon,
Sarah