Tax Deductions for Business Owners
When do you start hunting for tax deductions? If you are like most taxpayers, the answer may be around the IRS tax filing deadline. Often, that’s too late to make a difference.
Business owners have many opportunities to generate tax deductions throughout the year. Whether you are self-employed or run your own corporation, you can plan ahead to slim down your IRS bill by using the deductions described in this article.
- Home office deduction: You may deduct expenses allocated to the portion of your home that you use exclusively and regularly for business. To qualify, your home must be your principal place of business or be used to meet with clients in the normal course of business. If your home office qualifies, you can deduct a pro rata share of your total rent or mortgage interest payments, real estate taxes, depreciation, homeowner’s insurance and utilities.
Planning Idea: It’s easier to qualify if you set aside a whole room exclusively for office use (not personal living needs).
- Business Use of Automobile – Business owners commonly use personal cars to run work-related errands, visit clients, or buy supplies. The cost of commuting from your home to a separate office is not deductible. But if you qualify for the home office deduction (above), you can deduct the cost of traveling from a home office to any other work-related location. Two methods are available for calculating the deduction: 1) You may deduct a standard IRS-approved cost per mile; or 2) You may deduct the actual costs of vehicle operation based on the portion of total miles driven for business use. In most cases, mileage is the simpler calculation, but in either case the IRS requires you to document all business miles.
Planning Idea: Keep a notebook in your car. For every business trip, log the starting and ending odometer readings, the business purpose and date.
- Gifts – If you give gifts to clients, such as a fruit basket at the holidays, the IRS allows you to deduct only $25 per person annually. However, with smart planning you may be able to increase the deduction. For example, you may deduct costs of wrapping, delivering or insuring gifts above the $25 limit.
Planning Idea: If a gift is intended to be used by a number of people, not an individual, you may be able to deduct more than the $25 limit. For example, suppose you regularly send a $100 holiday fruit basket to the president of a client firm. Only $25 is deductible. However, if you send the same basket to “all employees” of this firm, the full amount could be deductible (@ $25 per person). Consult a tax advisor for specific guidance.
- Employee Meals – If your business provides free meals for employees and does not include their value as taxable compensation, you generally may deduct only 50% of the cost. However, there is an exception called “meals for the convenience of the employer” that can increase the deduction to 100%. To qualify, you must show that free meals: 1) were consumed at a worksite; 2) were offered to at least half of all employees; and 3) met a business purpose, such as increasing productivity.
Planning Idea: If you regularly “order in” food for employees and pay for it, document on the receipt how many employees participated, the date and time, and the business purpose.
- Business Interest Expense – With the exception of the interest payments on a home mortgage, most personal interest is not deductible. However, 100% of the interest on business-related loans can be deductible. To claim this deduction, you should clearly separate business loans from personal by using a separate consumer credit account, credit card, or bank loan solely for business expenses.
Planning Idea: Suppose you are a sole proprietor and must take a loan to pay yourself a month’s salary. The interest on this loan will not be deductible. However, suppose that in the same month, you are paying cash for ordinary business expenses. Take a loan from an account earmarked for business and use it to pay ordinary business expenses. This interest will be deductible.
For more ideas on deductible business expenses, visit the IRS’ Web site at www.irs.gov and download a copy of Publication 535, Business Expenses. Also, talk to a qualified CPA or tax advisor well before the end of your business tax year, so you will have time to plan ahead for reducing your next tax bill.
For further information email Rick Ray at: Rick_Ray@wealthdesigngroup.net
Next Week…Federal Tax Incentives Encourage Small Business Retirement Plans
