Taxes. We all want to pay less. With careful attention, you can. When you know what business expenses can be deducted, you’ll be certain you’re paying no more than needed.
The IRS defines business expenses as “the costs of carrying on a trade or business … usually deductible if the business is operated to make a profit.” Read on to learn how to maximize your profit when you use legitimate business expenses to reduce your taxes.
Rule one: Keep good records of business expenses
Keeping track of everything you spend is a must. Keep receipts. If you can’t get one, handwrite a record that includes the date, business reason, amount, and vendor you paid.
If you need an easy way to learn how to organize your business finances, consider using accounting software designed for the small business. Look for a system that’s easy to use, offers a robust help menu, and good customer support. You’ll save tons of time and have fewer headaches later. Consider scanning all receipts because digital records take up less space.
Rule two: Know which expenses can be deducted
Not all expenses are deductible. Stay current on those that are and spend wisely. See below for a description of many common business expenses.
Fully deductible expenses
When you use a good small business accounting system, there will be a separate account (or category of expense) already set up for the most common expenses. Below are some examples of allowable business expenses:
- Fees, dues, and subscriptions. The fees you pay to your accountant or bank; memberships to professional organizations; and subscriptions to industry publications are all deductible.
- Advertising, marketing, and promotion. Any ads you place online or on paper; company or product brochures; and any giveaways with company information on them can be deducted. You can include the costs for delivery, and possibly the sales taxes you pay in your advertising and promotion expense. (See IRS Publication 535 or confer with your accountant for information specific to your jurisdiction.)
- Labor. This is the biggest expense for any owner with employees. It’s possible you can deduct what you pay yourself. Check with your accountant for the best way to minimize both personal and business taxes related to payroll. You probably can deduct the gross amount of what you pay the employee plus the employer’s share of all payroll taxes. And, you can include anything you pay temporary workers or independent contractors.
- Benefits, continuing education, or training. Do you offer health insurance? Dental? Do you send employees to learn new software or processes? Do they attend lunch and learns? All may be deductible business expenses for you and/or your employees.
- Other Insurance. If you rent, you’ll have renter’s insurance. If you own, you’ll have property and casualty insurance. If you’re in a partnership, you might have owner’s life or disability insurance on each other to continue the business should one partner fall ill or die. Generally these are deductible expenses.
- Office equipment and supplies. Did you know you have the option to deduct the entire cost of that new computer or copier in the year you bought it, or to deduct the depreciation over several years? Your tax accountant can tell you which is best for your situation, and the IRS has information as well.
- Rent, utilities, and phones. Rent and all the bills associated with your place of business will likely be deductible. Look over your lease; you may also be able to deduct real estate taxes, special assessments, and more. Check with your accountant for details.
Partially deductible expenses
Be aware that some business expenses are not fully deductible. Some examples are:
- Gifts. If you give your clients holiday gifts, you can spend what you want. But you can only deduct $25 per gift. Consider giving a charitable donation in your client’s name instead; the donation is probably fully deductible.
- Meals and Entertainment. Because you also benefit from the meal or entertainment, only 50% of the tab is deductible.
Rule three: Split personal and business expenses
Splitting personal and business expenses can get tricky. Pay close attention to IRS documents for help. For example:
- Home office. You can deduct a home office or storage space up to 300 square feet. Calculating the deduction takes work to determine total square footage and apportion across all related expenses. Some of these are maintenance, repairs, insurance, utilities, and mortgage interest. However, the deduction is often worth the calculations. The IRS provides a worksheet.
- Mileage. If you use a personal vehicle for business, keep track of the miles traveled as well as all other vehicle-related expenses. Be sure to document those used exclusively for business. Compare mileage records to actual maintenance expenses, then decide which method will give you a bigger deduction according to the IRS constraints.
Some business expenses are never deductible. These include bribes and kickbacks, political contributions, memberships in social clubs (even if you entertain clients there), and any previous tax penalties or fines. If you’re ever in doubt, check with your tax accountant — and stay safe, sane, and profitable!
Looking for accurate, affordable online accounting for small business? Try Patriot Software and the first month is free!