Get the Small Business Tax Deductions You Deserve
by Margot Carmichael Lester, Staples® Contributing Writer
It’s easy to only think about small business tax deductions when you’re preparing your tax return forms. But it’s good business to track the numbers and store the data you need to get the valuable income tax deductions you deserve, whether you’re running a small business or a home business or are self-employed.
“Most small business owners don’t plan ahead,” says Santa Monica, CA–based CPA Bob Wheeler, author of The Money Nerve: Navigating the Emotions of Money. “It’s important to meet with your advisor, CPA or accountant at least quarterly.” Review deductible expenses and your quarterly numbers so you can make adjustments accordingly. This is true even if you’re keeping your own books and doing your own tax preparation. “After the end of the fiscal or calendar year, it’s often too late to implement tax savings. Plan ahead and be proactive.”
Here’s how to get those important tax deductions:
Understand Travel, Meals and Entertainment Deductions
The most common — and, at times, confusing — deductions that need to be tracked year round are travel, entertainment and charitable donations. These income tax deductions are defined very specifically, so it’s best to seek expert guidance in taking them correctly. “There are significant, burdensome documentation rules within the income tax laws for supporting travel and entertainment expenses, which, done in arrears, would be a huge task,” says Cathy Goldsticker, member of the tax services practice at St. Louis, MO–based firm Brown Smith Wallace.”
Learn more about these tax-deductible items from the IRS:
To make it easier to take these small business tax deductions, organize receipts and other supporting information as you go. “Best practice is contemporaneous evidence from third parties describing the item paid, along with a copy of the cancelled check,” Goldsticker says.
Explore Technology Solutions
Technology makes it easier to track tax-deductible items. That’s one reason financial and accounting software is so popular. “Many of the deductions are tracked within the system,” says Jonathan Barsade, a former tax attorney and now CEO of Exactor, the Philadelphia-based developer of an automated, end-to-end system that calculates sales and use taxes. “This saves the business owner the need to maintain a separate tracking system and methodology, and simplifies the process of collecting the deductions at the end of the filing period — whether it’s month or year — and figuring out how to integrate the information into the tax return.”
Scanners make it easy to create a digital record of documents and reduce paper clutter. Despite their increased use, some business owners are still uneasy about relying completely on electronic versions. If you’re one of them, consider binders and file storage solutions to safely stow your supporting paperwork.
Be Ready with Documentation
“Many people tell me they're reluctant to claim tax deductions for fear of being audited," says Bob Meighan, a vice president with TurboTax. "That's crazy. If you're entitled to a tax write off, claim it, but make sure you have documentation to support it in the unlikely event you are audited.”
Whether you’re digital or paper based, securely storing your documentation is critical, and not just because it makes it easier for you or your accountant to prepare your return. “Deductions tend to be red flags for state and local departments of revenue, and the first question that comes up is a request for supporting documentation,” says Barsade.
Does spending an hour or two each month organizing small business, home-office and/or self-employed tax-deductible items sound like a big time commitment for a busy business owner like you? Maybe. But those dozen or so hours will be low-stress and high-productivity, versus the frenetic last-second scramble to track down, gather up and organize income tax deductions just prior to the filing deadline.
Remember, it’s almost always cheaper, faster and easier to do things right from the start than to go back and correct inadvertent mistakes.