Small Business Tax Deductions: 5 Tips to Save You Money
by Taylor Sisk, Staples® Contributing Writer
Is that deductible? Excellent question. Knowing what you can and can’t deduct from your taxes makes a tremendous difference for your business’s bottom line.
Many deductions are pretty obvious: employee wages; building rent; capital expenses; supplies; business phone costs; the cost of goods sold; most insurance, taxes and licensing; advertising; repairs and maintenance; business interest; retirement plans; and charitable contributions.
But other deductions aren’t so obvious or require some expertise to decipher. Here’s some advice that might save you big bucks, or keep you from getting into trouble with the Man.
Schmoozing Allowed — Within Reason
Bob Wheeler, CEO of Santa Monica, CA–based RWWCPA.com and author of The Money Nerve: Navigating the Emotions of Money, says a good rule of thumb is that business deductions can be taken if “you or a reasonable person can show a justification for the expense.”
“You can deduct magazine subscriptions if you have a waiting room and the magazines are for clients,” he says. “You can deduct magazine subscriptions if they are related to your profession. If the magazine is just for your personal use, it is not deductible.”
You can also deduct conference expenses if you go to an event, attend it and return directly home. “Where it can get tricky is if you go to a three-day conference but stay for two weeks and the rest is personal,” says Wheeler. “You have to prorate the days, the lodging and the travel since they’re not all attributable to business.”
In addition, networking and schmoozing may be considered a business expense. “Again, you need to be able to substantiate the deduction. For drinks or a meal, you would need to state who you met with and the purpose of the meeting.”
A Toy-Free Zone
"If you work out of your home, there's a good chance you may be able to write off some of the costs of home ownership," explains explains Bob Meighan, a vice president with TurboTax. "Claiming a home office deduction allows you to reduce your business income, which means a lower tax bill on income taxes and self employment tax. But there are specific rules and qualifications you must follow."
For example, if you’re paying rent and using part of the space for an office, it needs to be for business use only. “You can’t have a TV and kids’ toys and other personal items in the office space if you're going to claim it,” Wheeler says.
The IRS used to require a separate entrance, but that condition has been relaxed. That said, “'home office’ is still a potential red flag to the IRS, so you want to be able to substantiate the deduction," Wheeler continues. You can also deduct for mileage from your home-based office, assuming the travel is all business related.
It’s Not Personal
“Small business owners often get themselves in trouble by running the business as their personal checkbook,” says Neil Keller, a partner in Naperville, IL–based professional services firm Sikich LLP’s tax practice. “Personal items are not deductible, so if it doesn’t have a business purpose, you likely won’t receive a deduction for it.”
“Sometimes that’s tricky, though. While dues for a business organization are potentially deductible, country club dues are not. If you take out a loan and use 80 percent for business expenses but 20 percent for personal ventures, you can only deduct the interest for the business-related portion,” he explains.
Take Some Credit
You should also be aware of potential tax credits. Linda Couch, COO of Parrish Services, a mechanical contractor firm serving Virginia, Maryland and West Virginia, found one right under her nose.
“A few years ago, we decided to look for a new accounting firm,” she says. “In our first consultation with a prospective firm, the accountant reviewed our prior year's tax return. She asked why we hadn't taken advantage of tax credits for land preservation our state offers. The answer was that we'd never heard of them. We switched accounting firms that year and saved tens of thousands of dollars based on just that one piece of advice.”
Save Everything
Keller adds that other expenses must be deducted over time as either depreciation or amortization. These include capital improvements such as equipment and office furniture or certain start-up and organizational costs.
Be aware, be vigilant and remember: “For all of your business expenses,” Wheeler says, “you need to have receipts, canceled checks or proof of the expense. For any business expense to be deductible, you need to show that it has a business purpose.”
“IRS publication, Publication 535, which is dedicated to deductible business expenses, is a great resource for a new business owner,” Keller says. Read it. And be sure to ask for advice when you’re unsure.
DISCLAIMER: This information is only provided for general informational purposes, and should not be considered as offering individualized tax advice. Tax laws are complex; please consult your tax advisor on specific issues related to your tax situation.