Are You Making the Most of Your Small Business Tax Deductions?
December 20, 2018
By: Cathie Ericson
You have to spend money to make money when you run a small business. Luckily, the Internal Revenue Service (IRS) allows you to write off much of what you spend in the pursuit of business income.
Unfortunately, if you fail to write off all of your business expenses, you may have more income on paper and an unnecessarily high tax bill. Wondering if you're missing important deductions? Take a look at these popular write-offs for small-business owners.
If you've just started your business, keep in mind to claim the expenses you incurred as you were becoming established. This includes a wide range of possibilities, including research, legal fees, marketing, application fees for office rental space, inventory and new computers.
In most cases, when you purchase items you are likely to use for years, the IRS doesn't allow you to write off the entire expense the year that you made the purchase. Instead, it requires you to "amortize" the expense or write it off incrementally over 15 years.
However, up to $5,000 of your start-up costs are exempt from this practice. So if you purchased new computers, a desk or other large items, remember to deduct as much of their cost as possible — and save your records. Whatever you don't deduct the first year, you may be able to deduct against business income in a future year.
The “Simplified Option” allows you to deduct $5 per square foot of the space that you use for the home office, up to a maximum of 300 square feet, making it easy to fulfill record-keeping requirements.
Alternately you can determine your office's size in relation to the rest of your home — and then deduct that portion of all your home expenses (mortgage, rent, utilities, general repairs, insurance, etc.). Note that this deduction is only relevant if you are self-employed; employees of a business may no longer use the home office deduction.
Do you drive a fair amount to get to client meetings or work events? Try to keep track of any miles driven for business, and deduct 54.5 cents per mile — as well as toll and parking fees.
Alternatively, you can deduct the portion of your vehicle's expenses related to your business. Say that you drive your vehicle 10,000 miles total and 5,000 miles for business; you can actually write off half of all your vehicle's expenses — including tires and maintenance.
Taking clients or prospects out to lunch or coffee is an important business-building activity, and the IRS continues to allow you to write off 50 percent of business meals, assuming they are not “extravagant or lavish.” In order to prove the validity of the expense should you be audited, try to jot down the names of those attending and the purpose of the meeting.
The IRS selects returns for auditing randomly, but there are also certain situations that increase your chance of being audited, and unfortunately, self-employment is one of them. There are certain red flags that catch an auditor’s eye and further raise suspicions, such as writing off 100 percent of your vehicle expenses as business costs or claiming your office fills half of your 4,000-square-foot home.
So try to make sure that you are diligent about keeping thorough records. Even if you are audited, you don't have to worry about extra taxes, interest or penalties — as long as you have records to back the deductions you claimed.
Keeping clear and well-organized records of your income and expenses can make tax time easier and ensures you don't miss any deductions. You simply need to keep accurate notes of all of your expenses — down to those file folders that keep your business organized.
About the Author
Cathie Ericson is a freelance writer covering business and consumer topics. She creates branded content for Fortune 500 companies, and her work has appeared in LearnVest, Costco Magazine, Forbes, TheGlassHammer.com and IDEA Fitness. Follow her @cathieericson.
All content provided herein is for educational purposes only. It is provided “as is” and neither the author nor Office Depot, Inc. warrant the accuracy of the information provided, nor do they assume any responsibility for errors, omissions or contrary interpretation of the subject matter herein. The information should not be relied upon as replacement for professional tax advice.
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