Figuring out what is deductible for businesses and what isn’t, can be a business in and of itself. Throw in the fact that the IRS publications 334 and 535 are very broad in the guidelines and this leaves room for a lot of interpretation (like most of the codes). Throw in different industries, and it can be confusing for most business owners. Ultimately, if it is an expense that touches your business in any way, there is room to write it off.
The IRS defines a business expense as a cost of carrying on a trade or business. And, generally speaking, these expenses are usually deductible if the business operates to make a profit. To be a deductible expense, the expense must be “ordinary and necessary” per the IRS. Interpretation can easily make something a tax deduction if you can prove it was something used for business purposes.
Expenses are a big deal. They can make or break you, merely by directing how much tax you will owe each year. My rule of thumb is this: pay in what you truly owe, no more or no less. This involves having an accountant that can help guide you on what is reasonable to deduct. Deducting expenses on your Income Statement (and hence, on your tax return) reduces your taxable income, which reduces your tax liability to the IRS (and your state revenue agency) each year. This equates to you having more money to invest back into your business.
Over the course of my time as an accountant, I see many expenses that are forgotten about. These are my top forgotten expenses by business owners:
MILEAGE You cannot deduct personal miles or commuting miles (to an office location), but mileage to and from client locations, business meetings, and networking events are deductible These all add up. In 2021, it is 56 cents a mile. Note that many business owners take this non-cash expense foregranted (Gas is not deductible, unless you have your vehicle on your books and you choose the actual vs. the standard mileage method).
CELL PHONE/INTERNET If you pay for your cell phone and internet of your household, how much of your cell phone do you use for business? Whatever the percentage is, you can take that percentage and multiply it by your monthly bill and enter that in as an expense onto your books in the form of a shareholder contribution. This one gets overlooked because these two items are generally in the business owner’s name, not the business, especially if you work from home.
MEALS Business and networking meals are now deductible 100% for 2021 and 2022. This is a huge shakeup in the tax deduction world. Many business owners forget to use their business card at restaurants and miss out in writing meals off. Save your receipts and document who you were with.
START UP COSTS What are the items or services you bought before your business went live? Did you set up an LLC? Did you contribute your personal laptop? These are items considered as your contributions into the business and therefore expenses on your books. Many owners forget to get these items onto the books because they did not have a business checking account or business credit card when they bought them. An accountant can layer them into your financials via a journal entry to get them included on your books.
HOME OFFICE WFH became a big thing in 2020. I like to think I was one of the early adopters of the trend back in 2011 when it wasn’t very popular. If you work from home, this is a big one most forget. In simplicity, add up all of your utility costs, HOA dues, and repairs & maintenance costs for the year. Take those amounts and multiply it by the fraction of the square feet of your office space to the total of the home. I like to book it as Home Office Expense on the books, or you can go through your tax CPA, who can plug in all of those figures into his tax software to come up with the amount on your personal tax return.
TRAVEL Most business owners will combine business trips with leisure time. Or, when on leisure trips, will conduct some sort of business. You can take deductions for business-related expenses (and part airfare and lodging) even if part of the trip includes personal vacation time. One caveat, if you have family along, you cannot deduct expenses for family members accompanying you on a business trip unless there’s a business reason for them to attend.
RETIREMENT SAVINGS
Retirement planning is something most business owners do not think about, as they are just thinking about making money and operating day-to-day. If you have a healthy cash flow that can have a portion set aside for savings, retirement plans are the best way to have a tax deduction and save for your future. The tax benefits you’ll receive depend on the retirement plan you have – IRA, 401(k), or one of many others. Businesses can establish inexpensive 401(k) plans with higher contributions for owners. Other retirement account options are available for small businesses as well and have low cost entry.
HEALTH INSURANCE
Depending on the type of business entity you own, you may be eligible to take advantage of a self-employed health insurance deduction on your personal return. This includes your premium cost and could be pretty significant, if you have your family on it as well. Most business owners do not realize this can be a deduction and run it through their personal funds.
