Business owners get more deductions. It doesn’t matter if you have a big business, a small business or a home-based business. All businesses get business deductions and that means less tax.
Before we go into the five most overlooked business deductions, make sure you have followed these three rules for business deductions:
1) Make sure you have a business that the IRS recognizes as a business. See How The IRS Can Disallow All of Your Business Deductions.
2) Keep good records for your business. That means keeping paper or electronic copies of your files.
3) Keep your accounting records accurate and timely. You should never be more than 30 days behind in entering data into your accounting software. Create a habit for this and it will never get too far behind.
Once you have those three rules covered, then we can talk about the fun stuff. This is where you save money.
Here are five commonly missed deductions:
1) Items You Gave to the Business
The best businesses think big, but act small – at least when it comes to spending money in the beginning. Chances are there were items you contributed to your business when you started. These were things you had bought personally, with your personal funds, and now are using in the business.
This could include your computer, cell phone, printer, desk, chair, fax machine and other items you use in your business now.
Make a list of the items with the fair market value. The business needs to pay you back for these items. It’s a deduction for the business and tax-free cash for you.
2) Home Office
If you have a space in your home that you use regularly and exclusively for business, then you have a home office.
Measure the total square footage of the business space and divide it by the square footage for your entire home. That gives you the business percentage.
Apply that percentage against your indirect home expenses. An indirect expense is one that applies to the entire house such as mortgage interest or rent, homeowner’s dues, utilities, insurance, property tax, maintenance and the like.
You will also likely have direct home office expenses. These are expenses that are specific to your home office space. For example, one of my clients put a wood floor in her home office. It was a direct home office deduction. Direct expenses don’t have to be allocated based on square footage. Some other possible direct expenses may be putting shelves in, converting a closet or lighting.
A lot of business owners get confused when it comes to deducting business meals. If you have a meal with a vendor, potential vendor, employee, subcontractor, customer, prospect or even your CPA, you probably have a meal deduction. It would be deductible as 50% on your tax return.
If you have a meeting at your place of employment and bring in a meal so that employees stay and work ‘for the benefit of the business’, you can deduct 100% of the expense.
The challenge for family businesses is that every meal can have a business conversation. But if you take a deduction for every meal, you’re just asking for an IRS inquiry.
Be reasonable in the amount of meals you deduct. Keep track of your receipts with a note as to who, why, when, where and why for the deduction.
Education expenses can be another misunderstood expense. If you learn something that prepares you for your business, before you start the business, the cost is not deductible. If you learn or improve skills once you have the business, the cost to do so is deductible.
You will need to prove that the education can help you with your business. That can be a pretty broad range, though. You can learn financial skills, technical skills, management skills and more. And in the right circumstance, all of them would be deductible.
5) Auto Expenses
Imagine you had a deduction you could take on your return that could potentially save you thousands of dollars every year. But there is one thing you have to do to take that deduction. Would you do that one thing?
In this case, I’m talking about the auto deduction and the one thing you have to do is track your mileage. There are several ways to take an auto deduction, but nothing is deductible unless you keep track of your business miles.
Here are three ways to easily track your mileage:
- Go old school! Keep a notebook in your car and make the habit of recording the mileage before and after every business trip.
- Download an app! There are apps like MileBug available for your smart phone. You can use that to calculate your business mileage.
- Take a picture! Use your smart phone (or digital camera) to take a picture of your odometer reading before each trip and the end of each trip. Save the pictures at an online storage site like Dropbox and give your tax preparer access.
Once you know your business mileage, you’ll have a couple of choices for how you take the deduction. You can take the cents per mile method. Periodically the IRS publishes the cents per mile you can take for your vehicle. In July 2012, that amount was 55.5 cents per mile.
Alternatively, you could take a deduction on the business percentage. Let’s say you accurately track your business mileage and find that 60% of your car use is for business use. You could then take 60% of all auto related costs such as gas, oil, maintenance, tires, insurance and finance charges.
At the end of the year, your tax preparer can help you make the decision as to which one is the best for your circumstances. Your job now is to track your mileage.
Business deductions = less tax. Make sure you’re taking all the deductions you can.
About The Author
Diane Kennedy, CPA helps business owners legally pay less tax. She’s the New York Times best-selling author of “Loopholes of the Rich”, “Real Estate Loopholes”, and 7 other best-selling financial and tax books. She’s also a business owner and real estate investor. Her motto is “It’s Your Money. Keep More Of It.” Learn more about Diane by visiting USTaxAid.
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