As a business owner, you’re entitled to a plethora of tax deductions. These tax deductions can help you to offset business income, which ultimately helps you be more profitable. Of course, you need to be careful with your tax deductions. Always consult with your CPA about which deductions are available to you, and how to take them. You don’t want to get into trouble with the IRS. Here are some common business deductions to be especially careful with.
Mileage Deductions
If you have a dedicated company car, the mileage expense deduction is pretty straightforward, although you do have to be meticulous about recordkeeping. You need to show that all the mileage was used for business purposes, which may entail a coordination between business appointments and the distance between your office and the client’s place of business. If your business driving is more speculative rather than appointment based (for example, you drive around town and knock on doors looking for business), it’s harder to prove that 100% of the mileage is business-related.
If you use one vehicle for both business and personal reasons, it’s even harder to avoid raising red flags. At least 50% of the use of the car must be for business purposes in order for you to be able to deduct mileage. And you’d better have really good records to back up your claim, too. Talk to your CPA about acceptable ways to track mileage that the IRS will be happy with.
Home Office Space Deduction
The IRS understands that more and more small business owners are working from home. That’s why they generously allow a home office space deduction. You can calculate this deduction either by using a percentage method or a square-foot method. But what you can’t do is take a deduction for a home office space if you use that space for any other purpose than a home office. The home office must be dedicated space. In other words, if your home “office” is the kitchen table or a partitioned area of the living room, that’s not going to work as far as the IRS is concerned. And if you think they will never know, you might want to reconsider. First of all, your house layout can easily be accessed online. If you say you’re using an entire bedroom as a home office in a two bedroom home and you’re filing married with two child deductions, that’s definitely going to raise some eyebrows and probably a red flag.
Employee Rewards
The IRS wants business owners to be able to reward deserving employees and as such, some employee gifts and bonuses are deductible. However, not every employee gift is deductible. For instance, you can’t gift your employee anything valued over $25 per year (and expect it to be deductible). And bear in mind that bonuses are taxable for employees as ordinary income, although they are deductible to the business owner. Consider enclosing a small note about the employee’s tax responsibility if you want to help your employees stay out of hot water.
Memberships
If you’re in a position to be able to afford memberships for yourself, that’s great. But not all membership fees are deductible. You can deduct membership fees for professional and trade organizations such as ASCE, the American Society of Civil Engineers. But you can’t deduct memberships to your local private golf club, even if you plan to network with clients there. You can, however, deduct the cost of meals taken with clients at the private golf club; a small but important distinction. Currently, the meal expense deduction stands at 50% of allowable expenses.
Entertainment
If you’re accustomed to treating visiting clients to tickets for the big shows that are in town, be careful. As of tax year 2018, business entertainment deductions are no longer allowed. The only entertainment expenses you are allowed to deduct are those for promotional purposes, such as events your business hosts.
Travel Expenses
Business travel expenses can land you in hot water if you don’t understand what’s allowed to be deducted and what isn’t. Your CPA can help to guide you as to what’s deductible so you can spend wisely while traveling for business. For starters, if you’re just traveling across town and back, that’s not considered deductible business travel because the travel must last “substantially longer than an ordinary day’s work.” In other words, the travel must be an overnight event. But too long is not good, either. The travel must be less than a full year. In addition, your business trip must be 100% business-related. It can’t be partly for business and partly for pleasure, though you’re certainly permitted to sightsee on your own dime. If you do personal activities, those expenses are not deductible. The best thing to do is to confine your business trip to business activities as much as possible, keep every single receipt and then give everything to your CPA when you’re ready to have your taxes done.
Donations
This is a tricky business deduction. Technically, you’re allowed to take deductions for donations to qualified charities, but there are rules involved. First, only corporate entities can take charitable donation deductible. If you’re not a corporation, you can still take a deduction, but it will be on your personal return. Second, the charity must be qualified by the IRS’s standards. Certain deductions are allowable and others aren’t. Cash and gifts are deductible, but time is not. So for instance, if you want to have your employees volunteer for an afternoon at the local charity around the holidays, you can’t deduct their payroll for that day. You may be able to deduct donations of business inventory and intellectual property such as patents, but only a percentage. Your CPA can provide details.
As you can see, there are numerous tax deductions that can help your business to offset income. But using these allowable deductions correctly requires knowledge and understanding that you may not have. It’s always a good idea to confer with your tax professional so that you can make sure you’re getting all the deductions you’re entitled to without raising any red flags.