Know what you can do to minimize your tax bill.
By Alexandra Walsh
A business expense must be both ordinary and necessary to be deductible, according to the IRS.
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense doesn’t have to be indispensable to be considered necessary.
It is important to separate your business expenses from the following: expenses used to figure the cost of goods sold, capital expenses, and personal expenses.
Since deducting expenses from your income reduces your tax bill, it’s important to make sure you have recorded everything you are legally entitled to. Use the following checklist as a guide to be sure you’re capturing all your business expenses and minimizing your tax bill.
Employees’ pay. You can deduct any amounts you give your employees for compensation in cash, property, or services.
Employee benefits. Benefits like health plans, adoption assistance, educational assistance, and life insurance for your employees are generally tax deductible.
Profit sharing or pension plans. You can deduct contributions you make to your employees’ SEP, SIMPLE, 401(k), and other qualified plans.
Auto maintenance and mileage. There are two ways to calculate vehicle deductions: standard mileage rate or actual expenses (gas, repairs, maintenance). You may use the method that results in a larger deduction on your tax return. Track your total auto expenses as well as business mileage so your tax adviser can help you calculate the maximum deduction on your tax return.
Utilities. The water, power, trash, and telephone bills at your business are all 100% deductible as regular business expenses. If you have a phone number mixing business and personal calls, you may still take a deduction for the portion relating to business usage.
Travel expenses. Nearly all business travel expenses are 100% deductible. These include airfare, hotels, and other on-the-road expenses (like Wi-Fi or cab fares). Eating out on the road is also deductible, so don’t forget to track your meals as well.
Education. This includes seminars and trade shows, but don’t forget any magazines, books, CDs, and DVDs that are related to your business or industry. They are all 100% tax deductible. Also, travel to and from educational events can be tax deductible.
Entertaining. Eating out with colleagues on a day-to-day basis is not deductible—but if you bring along a client or prospective client, that meal is deductible. Taking a current or prospective client out for drinks is also deductible, but it has to be within a business setting or take place before or after a business meeting.
Petty cash and tips. Just because you didn’t get a receipt doesn’t mean you can’t deduct the cost. Small cash expenses here and there can add up to a significant amount by the end of the year, so make sure to track these items.
Advertising and marketing. Deduct the cost of ordinary advertising (business card purchases, yellow page ads, website costs, Google ad words), as well as promotion costs for good publicity (sponsoring a local sports team).
Depreciation or write-off. If you buy property to use in your business, you can take a tax benefit for it in the current year or over time. Make sure to account for these purchases.
Service fees. Fees charged for processing credit cards are 100% deductible.
Office supplies. Pens, paper, staples, thumbtacks . . . track these items because they do add up.
Bad debts. Your bad debt may be deductible if the amount owed to you was previously included in income. Make sure to speak to your tax adviser about this.
Professional fees. Accountants, lawyers, and other professional consulting fees are fully deductible.
Furniture. You can either deduct the entire cost of office furniture in the year of the purchase or depreciate it over several years.
Office equipment. That new copier or computer is also 100% deductible. You may be able to take it all in one year or depreciate it.
Repairs and maintenance. The cost of repairs to keep your business property and equipment in operating condition is deductible.
Insurance premiums. You can deduct premiums you pay for credit, liability, malpractice, and workers’ compensation insurance, among others.
Interest. Mortgage interest, finance charges (like credit cards), interest on payment plans, and interest paid on other loans are all 100% deductible.
Software. Boxed or downloaded software used for business are generally deductible. With more software being made available as a service, software subscriptions are also tax deductible.
Licenses. Licenses, fees, permits as well as regulatory fees are generally deductible.
Taxes. As strange as it may seem, taxes incurred in running your business may be deductible.
There are thousands of items business owners can take as tax deductions. If you are ever confused about whether or not an item can be written off as a business expense—always assume yes. Keep track of these uncertain items and have your tax adviser help you determine what the best ways are for you to benefit from these expenses.
Here are some tips on how to manage your taxes throughout the year.
- Think about taxes all year long. Small business owners should not treat income taxes as a once-a-year event. Rather, tax planning should be a year-round activity. Waiting until the last minute makes tax preparation more complicated, and it limits your money-saving options.
- Hire a pro.A knowledgeable tax attorney or accountant is well worth the expense, experts say. Tax laws are complex, and they are difficult for many busy small business owners to weed through. A professional can identify tax breaks and deductions you might otherwise miss.
- Be aware.Even with the help of a skilled professional, a small business owner must keep up with news related to laws. Read business articles and keep up with tax legislation in Congress.
- Don’t make assumptions. Tax planning, to some extent, is a gamble. Never make business decisions assuming a particular tax break will pass or certain policies will be enacted.
Just because yours is a small business doesn’t mean you’re only entitled to small tax deductions.