tax 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.

 

Tax law changes mean inflation adjustments

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

taxes-blog-tax-law-changes-mean-inflation-adjustments

In addition to making some temporary tax breaks permanent, 2 measures that became law on Dec. 18, 2015, also provide for annual inflation adjustments to the tax benefits.

The Protecting Americans from Tax Hikes, or PATH, Act dealt primarily with tax extenders, those tax laws that expire and must be renewed. PATH was rolled into the Consolidated Appropriations Act, or the fiscal 2016 spending bill, which also included some tax provisions.

3 tax laws that are permanently in the Internal Revenue Code thanks to those laws now require the Internal Revenue Service to calculate the effect of inflation and annually adjust the tax breaks accordingly.

The IRS has now done that. Here are the inflation-adjusted amounts for the 2016 tax year for educators’ classroom expenses, commuting costs for workers who use public transportation as well as a popular business write-off.

No 2016 increase for teachers’ deduction

Teachers and certain other elementary and secondary school employees can deduct some of their out-of-pocket costs for classroom items. When this above-the-line deduction, meaning you don’t have to itemize to claim it, was made permanent, the long-standing $250 deduction amount was set as the base.

The expense amount also was tweaked so that it will increase as inflation dictates. That’s good news for educators. But since inflation in 2015 was low, the IRS says that there won’t be any bump up for the 2016 tax year. The deduction stays this year at $250.

Public transit benefit bump

Employers can subsidize their workers’ commuting or parking costs with pretax dollars up to an allowable monthly limit. Previously, the amount allowed for parking benefits was greater than that given employees who commuted using public transit.

As part of the tax extenders, that disparity was evened out. And as part of the December tax law changes, parity between the two transportation options was made permanent.

In addition, the amount allowed for van pool and other transit options are now pegged to inflation. In 2015 that monthly amount was $250. For 2016, it goes to $255. The increase applies to parking benefits, too.

Enhanced business expensing

One way businesses can reduce their tax bills is to write off the costs of new equipment. In many cases, this requires spreading the costs over several tax years through depreciation.

But section 179 expensing allows for some costs to be deducted in one tax year. And at the height (or depth) of the great recession that began in 2008, Congress increased the expensing amount to help economically struggling businesses continue to operate and grow their companies.

With the December extenders and spending bills, lawmakers permanently set the maximum amount of newly acquired property costs that a business can expense, or deduct, in one year at $500,000.

Once a business exceeds a certain amount of qualifying equipment purchases in a tax year, the deduction is reduced. Under the new law, that phaseout starts at $2 million in purchases

Both of those limits now were indexed for inflation.

For 2016, low inflation means that the IRS did not hike the $500,000 deduction amount. However, the $2 million phaseout threshold increases this year to $2.01 million.

Now that the new permanent tax breaks are on the books, look for these adjustments to be included in the annual announcement of other inflation-affected tax provisions that the IRS releases each fall.

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.

 

Individual Year End Tax Planning Ideas

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!  

DeathtoStock_Simplify10As we approach year end, it’s time again to focus on last-minute moves you can make to save taxes — both on your 2014 return and in future years. Here are a few ideas.

Maximize the benefit of the standard deduction. For 2014, the standard deduction is $12,400 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,200. Currently, it looks like these amounts will be about the same for 2015. If your total itemized deductions each year are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so they are high in one year and low in the next. For instance, you might consider moving charitable donations you normally would make in early 2015 to the end of 2014. If you’re temporarily short on cash, charge the contribution to a credit card — it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2015. But, watch out for the alternative minimum tax (AMT), as these taxes are not deductible for AMT purposes.

Consider deferring income. It may be beneficial to defer some taxable income from this year into next year, especially if you expect to be in a lower tax bracket in 2015 or affected by unfavorable phase out rules that reduce or eliminate various tax breaks (child tax credit, education tax credits, and so forth) in 2014. By deferring income every other year, you may be able to take more advantage of these breaks every other year. For example, if you’re in business for yourself and a cash-method taxpayer, you can postpone taxable income by waiting until late in the year to send out some client invoices. That way, you won’t receive payment for them until early 2015. You can also postpone taxable income by accelerating some deductible business expenditures into this year. Both moves will defer taxable income from this year until next year.

Secure a deduction for nearly worthless securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules for capital losses and the wash sale rules restricting the recognition of loss if the security is repurchased within 30 days before or after the sale).

Invest in tax-free securities. The most obvious source of tax-free income is tax-exempt securities, either owned outright or through a mutual fund. Whether these provide a better return than the after-tax return on taxable investments depends on your tax bracket and the market interest rates for tax-exempt investments. With the additional layer of net investment income taxes on higher income taxpayers, this year might be a good time to compare the return on taxable and tax-exempt investments. In some cases, it may be as simple as transferring assets from a taxable to a tax-exempt fund.

Again, these are just a few suggestions to get you thinking. Please call us if you’d like to know more about them or want to discuss other ideas.

Herman and Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

 

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.