A Tax Deduction Checklist for Your Small Business
Very few people enjoy tax season, but if you own a small business, this time of year can be a massive headache. Countless exemptions, credits and deductions are available to you, but you don’t necessarily have the troves of accountants and lawyers available that a Fortune 500 company would. Just when you think you’ve done your taxes just right, you find out that you could have deducted this or that you shouldn’t have deducted that.
Although we can’t list every tax deduction available, we want to let you know about a few major ones you should take full advantage of. But beware – don’t get too carried away, or you might find yourself entangled in far more problems than you had before.
There are two different ways to deduct automotive expenses. The first is the actual expense method, where you keep track and deduct all of your actual business-related expenses using the car.
You can also opt for the standard mileage rate method. For 2014, you can deduct 56 cents per mile driven. (That jumps to 57.5 cents for 2015.) Also eligible for deductions are those pesky parking and toll fees; the business part of the interest on your car loan; and state and local property taxes.
Beware: If you try to deduct parking tickets and fines for blowing the toll booth, expect an unfriendly letter from the IRS.
You can write off any fees for professional development events, corporate conferences, team-building activities and trade shows. Also, feel free to deduct subscriptions to trade magazines and webinars – anything that helps you keep up to date with your skills and industry demands.
Beware: Of course you want to go to that high-tech trade show coming to town. But if you’re an accountant, insurance salesman or something else that doesn’t relate to the conference you’re attending, keep it off your tax forms. Also, your Sports Illustrated subscription is not tax-deductible unless you’re a sports writer.
If you pay for entertaining current or potential customers / clients, you can deduct half of the cost. But one of two criteria must be met: It must be directly related to the business and business is discussed at the event, or it must be associated with the business and entertainment takes place immediately before or after a business discussion.
Beware: Going to the baseball game with your five closest friends from high school does not constitute business entertainment.
Do you have an accountant who runs your books? Deduct it. An attorney who provides legal counsel? Write it off. Any professional services fees are 100 percent tax-deductible.
Beware: We understand that running a business is stressful. But writing off your visits to a therapist because you think it will help you operate your business more effectively probably won’t work with the IRS.
Employee or Client Gifts
Want to show employees and clients your appreciation? Uncle Sam approves — any gift to a client or employee can be deducted in full, up to $25 per year per person.
Beware: If your mother-in-law uses your law firm to have her traffic tickets fixed, she should receive the same gift that other clients receive.
The gas, electric, trash, water and telephone bills at the office are all fully tax-deductible. If you work from home, you should measure your work area and divide it by the total square footage of your home to determine how much you can claim.
Beware: If you deduct telephone bills at the office, they must be for business calls, not personal ones.
If you rent office space, those monthly payments are tax-deductible. If you work outside of your rented apartment, you once again should measure the work area and divide it by the total square footage of the unit where you reside.
Beware: There’s one important caveat to this rule: you cannot deduct any rent if you have any equity whatsoever in the property or if there’s an agreement that you will receive some in the future.
Feel free to deduct the interest and carrying charges used to finance business purchases on credit. You can also deduct the interest on your personal loans, provided that money was used for business purposes.
Beware: Did you max out that Visa card to remodel your basement? Unless that’s your primary work location, you cannot deduct that.
If you purchase an asset that will be used beyond the current tax year, you must spread the depreciation tax deduction out over the expected life of the asset. For instance, if you buy a machine for your business that is expected to last 10 years, you have to slowly write off that expense over time.
Beware: Certain things can’t be written off even if they do depreciate, including inventory and land.
Any charitable contributions that a company makes can be written off. If your business is a partnership, LLC or S corporation (taxed like a partnership), the deduction can be passed down to your personal tax return. A C corporation can deduct charitable contributions from its own tax returns.
Beware: Charity does not include your brother-in-law’s political campaign or your daughter’s Kickstarter campaign selling hipster sunglasses.
For more information on business tax deductions, check out these resources: