Business Tax Deductions

Small Business Owners: Manage Your Tax Burden by Leveraging These Deductible Expenses

There are many advantages of self-employment. Not only do you have the flexibility to make your own schedule, but you can also manage your finances in a way that will minimize your tax burden. If you are spending money on anything that is related to your company, then it is important that you are working with your accountant to write off the applicable expenses.

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How do you know which expenses are deductible? Your accountant can provide specific insights to help you include all of the transactions for your business. This professional financial advice will ensure that you are following the IRS rules. Here are some of the main deduction categories that shouldn’t be overlooked:

1. Home Office Space

If you want to deduct a home office, you need to make sure that the space is dedicated to your work activities. The work area needs to be dedicated to your business and nothing else, creating a clear line between business and personal activities.

You don’t necessarily need to use a full room for this deduction. But, if the room is shared with any personal activities, then you will need to calculate the work area compared to the overall space. The best way to figure this calculation is to determine the amount of space used for work, and figure out the percentage compared to the overall square-footage of your home.

Once you have determined this percentage, then you can calculate the portion of your mortgage, rent, utilities, insurance, internet costs, and other household expenses that should be included on your tax claim.

2. Furniture and Equipment

Whether you are buying a new computer or you need a desk to use in your home office, these expenses can be deductions on your taxes. Since the purchase is for business purposes, there is no doubt that they are necessary to keep your company running.

But, like the home office space, there is a fine line to show that the furniture purchase is for business purposes. For example, if you have the family computer in your office and there are kids in the house, then the IRS could potentially ask whether you are using your business computer for other family activities. Instead, it is best to set up the family computer in a different location and use your company computer only for business-related activities. Regardless of IRS tax rules, this is a good idea anyway.

There are two methods that can be used to deduct furniture and office equipment:

  • Take a 100% deduction the year that the purchase is made
  • Depreciate the purchase by deducting a portion of the expense for several years

Your accountant can help you choose the deduction method that will work best for your situation. The simplest solution is to take the full deduction when the purchase is made. But, there are times when it might make sense to use the depreciation method instead.

If you use depreciation for furniture, then the deductions will be split out over a period of seven years. In the case where depreciation is used for electronic equipment, such as computers, scanners, and copiers, then the depreciation is used over a period of five years.

3. Office Supplies

In addition to the big expenses for computer equipment and furniture, there are often other office supplies that are needed for a small business. Whether you are buying stamps to mail out invoices or you need more printer paper, these expenses can be used as deductions.

Any time you purchase office supplies, keep track of the details so that you can ensure that it was a business expense instead of a personal purchase. Hold onto the receipt and make sure that the transaction is recorded in your accounting software.

If you have a receipt that includes both business and personal spending, then you will need to calculate the portion of the cost specifically related to office supplies. The best solution is to have two separate transactions so that you have different receipts for business and personal.

4. Subscriptions and Software

Most businesses utilize some type of software for accounting or other business-related tasks. These software expenses can be deducted from your taxes. These transactions might be in the form of a one-time upfront payment to purchase a software. Or, many software companies are going to subscription-based payment systems that require a monthly or quarterly payment.

What other subscriptions do you have for your business? These subscriptions might include everything from magazines for your clients to read while they are waiting, or a delivery service that provides copy paper and ink on a consistent basis. Anytime you are paying a recurring fee, make sure to track the expense so that you don’t miss out on the tax deduction.

5. Insurance Costs

If you are self-employed, then you are likely paying for your own health insurance, long-term care insurance, and life insurance premiums. These monthly costs are 100% deductible on your taxes.

There are some limitations that your accountant will need to help you avoid though. For example, if you have a small home-based business, your profits will need to exceed the amount that you are writing off for your insurance premiums.

Also, if you were eligible for other health insurance, such as a plan through your spouse’s job, then you aren’t allowed to write off the full amount of independent insurance costs. That being said, if your spouse also worked for your home-based business in addition to their full-time job, then you can deduct the spouse’s premiums that were deducted from their paycheck.

If you choose to deduct the cost of premiums for your spouse’s insurance coverage, then you need to ensure that equal coverage is available for all other employees.

Talk to your accountant about your individual situation to ensure that you are following the guidelines set by the IRS for insurance premium deductions.

6. Travel and Entertainment

There is good news if you are traveling for business because the travel-related expenses can be used as deductions. But, you need to make sure that your trip is business and not personal entertainment. When you are heading somewhere on a business trip, the full expense of your hotel or accommodations is tax-deductible. You can also write off all of the cost of travel, including the plane ticket, rental car, taxi fees, and more.

Other costs of life on the road can also be fully deducted, such as tipping, dry cleaning, or any other costs that might be essential for daily living.

When it comes to meals and entertainment, you can only take a 50% deduction on these expenses. Keep the receipts, and make sure to record down how the meal related to your business efforts.

7. Car Mileage

Make sure that you are tracking your mileage every time you get in the car for business purposes. If you drive for business, then those miles can be written off. The car trips could be for anything related to your company, including a visit with a client, a trip to the bank, or driving to a conference or event.

You need to keep documentation of your mileage. Put a notebook in your car where you record the date, mileage, and the purpose of the trip. At the end of the year, you have two options to write off the mileage on your car:

  • Total the mileage, and your accountant can do the math based on the annual mileage rate. In 2016, the rate was 54 cents per mile. In 2017, the rate is 53.5 cents per mile.
  • Calculate the percentage of time when the vehicle is used for business purposes vs. personal driving. Then, use that percentage to deduct a portion of your payment, repairs, gas, and insurance.

When you have a home-based business, the mileage can start from the moment you pull out of the driveway. If your business is based in an office, your mileage starts when you leave the office to your off-site destination. With an office-based business, you cannot deduct the drive from your home to the office and back.

8. Contributions to a Retirement Account

Certain types of retirement accounts can be tax-deductible, giving you the benefit of shielding some of your income in a given calendar year. Talk to your accountant for suggestions about the type of account that you should be using. Then, set up an account and make contributions to that account throughout the year.

These contributions can be deducted on your personal income tax return if the contributions are made to a qualifying retirement account.

Get Expert Advice from Easier Accounting

Are you interested in learning more about how you can maximize your tax deductions this year? It is important to have an experienced accounting team help you with your tax filing and ongoing bookkeeping systems.

For more information about our first-rate accounting services, talk to our team here at Easier Accounting. We are focused on accounting services for small business owners, giving you the benefit of working with an accounting team that truly cares about you and your company.

For more information about the services that are available, we invite you to contact us right away: (888) 620-0770

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