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The 5 Income Tax Deductions the Small Business Can’t Afford to Overlook

Its tax time and many small-business owners might be leaving hundreds, even thousands of dollars on the table.

“Numerous businesses over-pay their taxes every year by overlooking various tax deductions,” says Michael Raanan, a former IRS revenue officer who is president of Santa Ana, Calif.-based Landmark Tax Group.

Business owners simply are often unaware of the deductions available, and in some cases, they may not keep detailed records or shy away from itemizing or complicated number crunching. It is these habits that can become extremely costly when you are getting ready to file your return.

To help you navigate these complicated issues, we have put together expert opinions and advice so that you may utilize this information before the April deadline to file.

TaxesBusiness-related meals and entertainment. Tax strategists and CPA’s have found that costs for lunches, dinners and client-evenings out can easily run into the thousands of dollars. Business owners often don’t deduct the expenses because they aren’t sure whether such meetings were business-related, and they don’t save the receipts. Although events must involve work, there’s no hard and fast rule over what portion of the meeting needs to be taken up by business talk. You rest easy when deducting it as long as you can show a new client lead or a service referral, or other potential furtherance of your business came from the meeting. Remember, it is best to always save the receipt, even though a bank statement can work for meals or entertainment expenses under $75, and make a quick note of the business-related purpose on it. In this day and age, there are apps for your smartphone that will enable you to photograph the receipt and act as a journal for tracking your spending. If you aren’t comfortable with the tech approach, a small journal where you can simply enter the who, what, when, and how much will suffice.

Crunching car expenses the hard way. Sure, a business owner can go the easy way and calculate business-related car costs using the IRS standard mileage rate. The flip side is to instead divide business-related miles by total miles driven and then applying the percentage not only to gasoline costs but all the actual expenses related to that vehicle, including car washes, tires changed — even satellite radio fees. The difference can be hundreds of dollars in deductions. As with meal and entertainment expenses, a smartphone app, or day planner becomes an important tax record. Please note that miles driven from home to the office and back are not business-related mileage.

Choosing the tougher path on the home office. 2013 was the first tax year in which the IRS is allowed a simplified home-office deduction of $5 per square foot, with a limit of $1,500 for 300 square feet of home office space. Many tax professionals suspect it possible for some business owners to squeeze out thousands of extra dollars by using the traditional, albeit more complex method, which involves measuring the home office’s square footage, dividing it by the home’s total square footage, and then applying the percentage to a host of home-related expenses from mortgage interest to utility bills to home depreciation. Take the time to use calculate it both ways. You must remind mindful of the traditional method’s potential “depreciation recapture” should you someday sell the home for a profit, and make certain that the area you claim as office space is clearly defined and that is used solely for business purposes. The area cannot double as a play area for your kids.

Remembering start-up costs. Many new business owners often overlook that the expenses incurred to get the business off the ground can be deducted once the business is up and running. Do not lose track of these costs. Some of these expenses could range from a continuing education course to lunch with a future client, or even a previously-purchased piece of equipment that has been repurposed for your business use. There is no set limit on when the expense could have been initially incurred. Once the business starts generating revenue, those expenses can then be counted as deductions. You can elect to deduct as much as 5,000.00 in the first year and then amortize the rest over 15 years.

Don’t forget employee expenses. The reimbursed expenses of employees are also deductible, especially with expenses such as gas, meals, hotel accommodations, tips, transportation and baggage fees. In order to capitalize on this, a business needs to have an “accountable plan”. That plan must show the reimbursed expenses were actually business-related and require the Employee substantiate their expenses within 60 days and refund any excess advances within 120 days.

It cannot be stressed enough how important record keeping is in all of this. Safeguarding and managing the receipts and logs is of utmost importance. As stated earlier, technology presents many user-friendly applications that can relieve the burden that record keeping can become. If we apply the keep it simple framework, all you need is an envelope and a journal. Make a sound accountable plan and review the information at set intervals. Also, tax strategies should be looked at over the course of several years. Sit down and take the time to develop a sound strategy that utilizes a solid plan.

January 29, 2015
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