A Contractor's Guide to Business Write-Offs

Once you're running your own contracting business, you need to understand how business expenses, or "write-offs," actually work. The concept is simple: a legitimate business expense reduces your taxable income. If your business brings in $80,000 and you have $20,000 in costs, you pay tax on the remaining $60,000.

The key is knowing what the IRS considers a legitimate cost. For an expense to be deductible, it must be both ordinary and necessary for your line of work (IRC § 162(a)).

Vehicle, Tools, and Material Costs

For the IRS, the distinction between personal and business use of a vehicle comes down to records. You're required to keep a mileage log that details the date, miles, destination, and business purpose for each trip (IRC § 274(d)). With that log, you can use one of two methods:

• Standard Mileage Rate: A per-mile rate set by the IRS.
• Actual Expenses: The business-use percentage of your actual costs, which includes gas, insurance, repairs, and depreciation. The interest on your vehicle loan is deductible, but the principal payments are not.

The same logic applies to your tools and materials. Beyond the obvious materials for a specific job, you can deduct the cost of consumables like saw blades, tarps, and small tools that wear out. Larger equipment purchases are typically depreciated over several years, while equipment rentals are deducted as a current expense.

Overhead and Workspace Expenses

Deducting a space in your home requires you to meet strict guidelines. A home office or storage area is only deductible if it's used exclusively and regularly for your business, such as your principal place of business or for storing inventory if your home is your sole fixed location (IRC § 280A).

Other standard overhead costs are more straightforward. These include your business liability insurance, license renewals, equipment repairs, and maintenance on your work vehicle (for the portion of business use).

Common Points of Confusion: Meals and Gifts

Certain expenses have very specific rules.

• Meals: A meal is generally 50% deductible only if it's for business with a client present or if you're traveling for work away from home overnight. A lunch you buy for yourself while working on a local job site is considered a personal expense and isn't deductible.
• Gifts: The deduction for business gifts is limited to $25 per recipient per year (IRC § 274(b)(1)).

What Isn't a Business Expense

It's equally important to know what you can't deduct.

• Entertainment: Taking a client to a sporting event or a concert is 100% non-deductible (IRC § 274(a)).
• Fines and Penalties: A speeding ticket or a government fine is not deductible (IRC § 162(f)).
• Commuting: The miles from your home to your first work site are generally considered non-deductible commuting miles.

The Importance of Good Records

The IRS expects a professional contractor to have business expenses. They also expect you to have the records to prove them. Keeping clean, consistent records isn't just about taxes; it's a fundamental part of running a sound business. A simple system of saving receipts and maintaining a mileage log ensures your tax return is accurate and you're not paying more than you legally owe.