One of the benefits of setting up an business entity is to take business deductions. Here we describe some of the more common deductions that small business owners take. Please note that you should always check with your certified public accountant before taking any deductions as things can change over time.
Here are some common business deductions:
- AUTOMOBILE: Everybody want to write this off. But this deduction can be a red flag at the IRS and is commonly over-deducted. You can only write off that portion of car expenses that equals the portion of use of your car for business purposes versus personal use., If audited you will have to justify that use, whatever it is. Going to and from your office is not business use. Traveling to or for clients is. Keep track of miles with a travel log. This is good record keeping! It will prove invaluable.
There are two methods for calculating the deduction: by mileage or actual expenses. Usually the actual expenses method is the bigger deduction but requires keeping track. You may also be able to depreciate your car and save even more.
- HOME OFFICE: You can write-off a portion of your home expenses, like utility bills, if you use a part of your home as an office. As long as you can justify that part of your home is a principal place of business, separate from other parts of the house and you use it regularly and exclusively for business, it’s a deduction. Again, keep all records of your home expenses and give them to your accountant.
- EQUIPMENT AND FURNTITURE: Office computers, fax machines, desks and etcetera can be depreciated and deducted. Keep receipts of these purchases and tell your account about them.
- RETIREMENT PLANS: Contributions to some retirement plans are tax deductible. LLCs and S-Corps are more limited in the kinds of plans you can contribute to than C-Corporations. But, you can still start retirement! Talk to a financial planner for what is right for you and your type of entity.
- START-UP COSTS: You can take deductions for the cost of setting up your business, like legal and accounting fees. There are rules, however.
- PROFESSIONAL FEES: Fees paid to accountants, lawyers, consultants or for professional licensing (like the board of realtors) are deductible. So are expenses to keep a professional license (like continuing education).
- SUPPLIES: Duh, all office and professional supplies are deductible.
- ENTERTAINMENT and MEALS: This is no longer a deduction for most small businesses.
- GIFTS: This is another biggie for many small business owners and the IRS. Gifts to clients are 100% deductible. BUT, only up to $25! That’s a big catch! Don’t exceed it!
- TRAVEL: Everyone loves this one! Transportation, baggage & shipping, lodging, laundry and things like internet or telephone charges are 100% deductible. Meals are only 50% deductible!—same as entertaining. The IRS assumes you’d have to eat if you were at home, and home-cooked meals are not deductible. You can use the Actual Expense method or the Per Diem method. The Per Diem rates change so make sure you check as you will probably save more with actual expenses. Travel must be for a business purpose! If you’re mixing business and pleasure, then the “primary” purpose of travel must be business (not political, investment or social). If you bring the family, you cannot deduct more than if you had traveled alone! But remember, the family still only needs one car and maybe one room, which you needed anyway! The key here is to legitimize the travel, keep receipts and not be extravagant. You can’t always write off “all of it” so always check with us or your accountant.
- HEALTH INSURANCE: Many people forget this one. Health insurance premiums can be 100% deductible. But, the deduction can’t be greater than the businesses net profit AND, if you “could” be covered by a spouse’s insurance program, you cannot claim your own expense. Out of pocket expenses (like your co-pay) are not deductible.
- CHARITABLE CONTRIBUTIONS: Well, here the answer is NO. These are not business expenses. Only C-Corporations can donate to charity. BUT, you can deduct these contributions off your PERSONAL income. So, give to charity!
- TAXES: Many types of taxes at one level are deductible on another. Make sure your accountant knows what taxes you are paying (like for employees!).
- ADVERTISING: Marketing costs are fully deductible. Some types are immediately deductible, others are deducted over years. Even sponsoring a sports team can be deducted! All you need is a “clear business connection” to the advertising.
- GENERAL BUSINESS EXPENSE: This is the catch-all. Anything that is ordinary, necessary and primarily for business is a legitimate business expense. Don’t forget things like internet service providers and cell-phones if you need them for business.
THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. PLEASE CONSULT AN ATTORNEY AND TAX ACCOUNTANT BEFORE MAKING ANY TAX DECISIONS.