As a self-employer or founder of a small business, it can be difficult to navigate the waters of the IRS annual exam (i.e. taxes). Though you can and should utilize the services of tax professionals and software, it is always good to have a basic knowledge of your own. Personal taxes can be complicated enough; filing as a business can be downright overwhelming. But if you’re willing to sift through the paperwork and read the fine print, you can save a lot of money in the form of tax deductions. Here are some basics of tax tips on deductions for small businesses.
Tax Tip #1: Home Office
Many small business owners are afraid to claim “home office” deductions for fear it will bring the auditor a-callin’. Fear of an audit should never keep you from claiming legitimate deductions. Just make sure you keep well-organized records, and that you can prove your deductions are indeed for business expenses and you’ll be fine. Here are some pointers when it comes to home offices.
- Make sure that your office is distinct from your living area. Whether it is a room of its own or a part of a larger space, there should be a clear line between your workspace and the rest of the home. Don’t use your office as a spare bedroom or a playroom for the kids.
- If you only have one computer, claiming it as the office computer will be difficult. No auditor will believe that it is not utilized for personal use as well. The burden of proof will be up to you, so either dedicate a computer solely to work, or omit the computer area from your office space.
- Figuring out the percentage of home expenses that is deductible for your business is simple. Measure your work area and divide by the square footage of your home. That percentage is the fraction of rent, mortgage, utilities, taxes, and maintenance you can claim.
Tax Tip #2: Technology Purchases
Up-and-coming businesses need to be up-to-date on their technology, and Uncle Sam does not hinder this. Under Section 179 of the tax code, equipment expenses such as computers, printers, and even company vehicles are tax-deductible, up to a certain amount. Depending on the item, you can deduct the full cost on the year of purchase, or split it between several years. You can find more information about the distinction between current and capital expenses here. Business-related software also qualifies under section 179. So don’t be afraid to get the technology you need to perform necessary business tasks. Just be aware of the amount you can deduct under section 179 because it changes yearly. Also, if you only have one car, you can’t justify that as purely a business vehicle, so don’t try to use the fact you have a business to pad your personal belongings. If you’re going to purchase a work vehicle, make sure it is only used for work.
Subscriptions to business-related websites and magazines are fully deductible. Combined with the conference deductions (discussed below), there is no reason not to stay informed in
Tax Tip #3: Travel Costs
Owning a small businesses that needs to travel is something many people dream of, and small business owners often get to realize that dream. Since travel can be necessary for business success and expansion, many of the expenses are completely tax deductible. Our tax tip on travel is to write off expenses like airfare, hotel fees, car rental and mileage, and travel expenses like laundry costs. Food is only deductible up to 50%, probably because the government figures you would have to eat whether you were traveling or not. Remember these points when deducting business travel expenses:
- Feel free to take your family with you, but only the costs for you, and only those that are business-related, can be deducted.
- If you’re taking clients out for a meal, those costs are 50% deductible, just make sure to write on the bill/receipt the reason for the meal. For example, “investment meeting with Jane Doe from Doe Enterprises.” This makes it easier for you to keep tabs, and easier for any auditors that happen upon your files. While no one wants an audit, if one does come your way, the more prepared you are, the less unpleasant the experience will be.
- Conference fees are deductible as long as the conference is directly useful for your business. If it’s a conference related to your industry or will help you run your business more smoothly, then it probably qualifies. If the purpose for going is to earn money on the side, then it’s not as impactful to your business, and is not as likely to qualify. And of course, fan conventions and other entertainment-based events do not count, even if there are lectures.
- Entertainment such as amusement parks, tourist attractions, and the like are not deductible. You can definitely combine business and pleasure, just don’t include the pleasure expenses in your deductions. If you are going for a business-related purpose, you may be able to write off the expense, but sometimes it’s safer just to call a good time a good time and save the write-offs for less ambiguous ventures.
As always with finances, especially taxes, it’s important to keep your receipts and details about the reason for purchases. While doing this for every purchase may seem over-the-top, it’s easy once you get into the habit of it. It will also save you a lot of grief if you get audited, and it will help you keep peace of mind that your finances aren’t going to get your business in trouble. The last thing you need is a pile of debt to the IRS. The more organized your finances are, the more you can focus on making your business successful. The cost of running and maintaining a business is high, but many of those costs can be reduced by filing your taxes knowledgeably. It’s never profitable to leave money on the table. Do your research, take the time to do your taxes correctly and completely, and put the money you save back into your business.
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