deductions

A Dozen Deductions For Your Small Business

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

By Bankrate

small business tax deductions

A small business offers plenty of opportunities for tax deductions. Just be sure to follow IRS rules.

Here are 12 that even savvy small-business owners and entrepreneurs sometimes forget.

the deductible dozen

1. Home office

To claim your home office on your taxes, the IRS says it must be a space devoted to your business and absolutely nothing else.

The deduction isn’t limited to a full room. Your home office can be part of a room. Measure your work area and divide by the square footage of your home.

That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

There’s also a simpler way to claim a home office deduction. Consider both the regular and simplified methods of writing off your home office.

“I don’t agree that chances of getting audited are greater with a home office deduction,” says Zobel, a San Francisco Bay-area tax expert who specializes in serving the self-employed. The key is that you use the term “home office” the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else. Deducting the den that houses the family computer and serves as a guest bedroom won’t fly with Uncle Sam.

“If you only have one computer and you have a child over 4, the IRS is going to be pretty certain that the child is using the computer,” says Zobel. “And the burden of proof is on you.”

The deduction, however, isn’t limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

There’s also a newer way to claim a home office deduction. Read “Use newer, simplified home office deduction” for details.

2. Office supplies

Even if you don’t take the home office deduction, you can deduct the business supplies you buy. Hang on to those receipts, because these expenditures will offset your taxable business income.

3. Furniture

Office-furniture acquisitions provide two choices:

  1. Deduct 100 percent of the cost in the year of the purchase.
  2. Deduct a portion of the expense over seven years, also known as depreciation.

To take the whole cost in one tax year, use the Section 179 deduction. There deduction cap for 2016 taxes is $500,000, but may be adjusted for inflation in future years.

If you choose instead to depreciate the desks and filing cabinets, you can’t simply split the cost into equal portions over the depreciation period. Instead, you must use an IRS chart to make separate calculations each year.

Which is better for you? Anticipate the times that your business will need these deductions the most. Both options are reported on IRS Form 4562.

4. Other equipment

Items such as computers, copiers, fax machines and scanners are tax-deductible. As with furniture, you can take 100 percent upfront or depreciate (this time over five years).

Does your business need a new copier? Put it on a business credit card.

5. Software and subscriptions

Section 179 provides another tax break. New computer software a business buys can be fully expensed in the year purchased.

For business and industry-related magazine subscriptions you can deduct the total costs as a full deduction in the year spent.

6. Mileage

If you drive for business, the IRS wants to give you some of your money back. You’ll need documentation, so keep a notebook in your vehicle to record the date, mileage, tolls, parking costs and the purpose of your trip.

At the end of the year, you have two choices:

  1. Total the mileage and add in the tolls and parking to calculate your deduction. Once you have your mileage total, multiply it by 54 cents for your 2016 deduction. For 2017 business tax purposes, the rate drops to 53.5 cents a mile.
  2. Measure your business usage against your personal driving and deduct that portion of your auto-related expenses. Remember to include gas, repairs and insurance.

If you are leasing, include those payments.

If you are buying the car, factor in the interest on your loan and depreciation on your vehicle.

If your company’s office is at your house, you can deduct the entire business-related mileage, from the minute you pull out of the driveway until you return home.

If your business is not home-based, your mileage meter starts at your first business-related destination and ends at your last. You can’t include the drive to and from home. In this case, try to schedule several business appointments on the same day to allow you to take the mileage between stops as a tax write-off.

7. Travel, meals, entertainment and gifts

Good news, small-business travelers. You might as well stay in a nice hotel, because the entire cost is tax-deductible. Likewise, the cost of travel — air, rail or auto — is 100 percent deductible, as are costs associated with life on the road (dry cleaning, rental cars and tipping the bellboy).

The only exception is dining out. You can deduct only 50 percent of your meals while traveling. So stay at the Ritz and eat at Wendy’s.

Once you get home, your on-the-job meals aren’t deductible — unless you bring along a client to talk business. In this case, you might consider splurging on a fancier meal because then you can write off half such work-related dining costs.

The 50 percent deduction limit applies to most other client entertainment expenses, too. But a direct gift to a client or employee is 100 percent deductible, up to $25 per person per year.

8. Insurance premiums

Self-employed and paying your own health insurance premiums? These costs are 100 percent deductible.

This break primarily benefits proprietorships, but there are limits. The deduction can’t be more than your business’ net profit. And it’s not allowed if you were eligible for other health care coverage, including that offered by your employed spouse’s medical plan.

Did your spouse work for you last year? You can get the full medical premiums deduction on your return. As an employee, your spouse’s premiums are 100 percent deductible; if you and the children were on his or her policy as dependents, so are those costs.

Two caveats:

  1. Your spouse’s employment must be real, not in name only, and you must offer coverage equally to any other employees.
  2. Failure to meet these requirements could result in a lawsuit, an audit or both.

You also can include some of the premiums you pay for long-term care insurance for yourself, your spouse or dependents.

9. Retirement contributions

Are you self-employed and saving for your own retirement with a SEP IRA or Keogh? Don’t forget to deduct your contribution on your personal income tax return.

10. Social Security

The bad news: If you’re self-employed or starting a small business, you have to pay double the Social Security contributions you would as an employee. That’s because federal law requires the employer pay half and the employee pay half. Self-employed workers are both, meaning the total will equal 15.3 percent of your net profits.

The good news: You can deduct half of the contribution on your 1040.

11. Telephone charges

You can deduct the cost of the business calls you make for business from home. When your bill comes in, circle the business-related calls, total them up and keep a copy. At the end of the year, tally your 12 bills and deduct 100 percent.

Regular fees and charges on your phone line don’t count toward your deduction. But if you have a second line installed and use it only for business, all of these charges are deductible.

If you use your cellphone for your business, you can claim those calls as a tax deduction. If 30 percent of your time on the phone is spent on business, you could deduct 30 percent of your phone bill.

12. Child labor

If you hire your children as employees at your business, you may be able to deduct their salaries from your business income if they meet certain requirements.

Also, there is no Social Security tax when you hire your child who is 17 or younger and you can deduct the salary as a business expense.

This break is available, however, only if you operate as a sole proprietor or as a partnership in which you and your spouse are the only partners. If your business runs as a corporation, then it, not you, is considered the employer and the corporation is not relieved of the tax liabilities.

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.

 

Business Expenses

You can save money by cutting certain business expenses.

You can save money by cutting certain business expenses.

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit. Westchester tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions!

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. 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 does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,
  • Capital Expenses, and
  • Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

  • The cost of product or raw materials, including freight
  • Storage
  • Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
  • Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

For additional information, refer to the chapter on Cost of goods sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.

Capital Expenses

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business.There are, in general, three types of costs you capitalize.

  • Business start-up cost (See the note below)
  • Business assets
  • Improvements

Note: You can elect to deduct or amortize certain business start-up costs.

Personal versus Business Expenses

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 5 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.

Business Use of Your Home

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Publication 587, Business Use of Your Home, and Standard Mileage Rates.

Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.

Other Types of Business Expenses

  • Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
  • Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirement.
  • Rent Expense – Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
  • Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses. Please contact our accounting firm in White Plains, NY if you have any questions.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.