It’s that time of year again when taxes are on everyone’s mind, whether you’re a business owner or not. If you’re feeling stressed this year, now’s the time to get your ducks in a row so that you’re better prepared next time around. And to help you do that, I asked the tax pro Jean Grady of Tax Jeanie (how cute is that?) to give us some guidelines for small business owners and freelancers.
Tax Deductions for Small Business
When you own a small business, you get to deduct money you spend running and growing that small business. Here are a few items you might not have considered.
If you use your car for business, you can deduct some of the costs of keeping it on the road. You can either keep track of and deduct your actual business-related expenses, or you can deduct 55.5 cents (for 2012) for each business mile driven. One caveat: if you use your vehicle for both business and pleasure, you need to keep careful track of how the vehicle is used by maintaining a log that details the total miles your vehicle is driven in addition to the business miles.
If you pick up the tab for a meal or coffee with current or potential customers, you can deduct 50 percent of the cost. The rule here is that the meeting must be “directly related” to or “associated with” the business, and business must be discussed immediately before, after or during the entertainment. On the receipt or bill, always make a note of the specific purpose for the meeting, and file it safely in case of an audit.
If you use a home computer partially for business, you will be able to deduct a percentage of the cost of the computer. Keep a log of business versus personal time. If you have two computers, you can designate one for personal use and one for business use. Cell phones fall under the same set of rules. Tally up your business calls at the end of the month and determine the percentage of time you used it for business purposes — that’s what you can deduct. Lastly, the first phone line in your home is never deductible, but, if you have a second phone line in your home for business use, it can be deducted in full.
When you travel for business, you can deduct the costs of transportation, car rental, taxis, lodging, meals and tips, shipping, business materials, clothes cleaning, telephone calls and technology charges. If your trip is split between business and pleasure, in most cases you can still deduct your expenses as long as the primary purpose is business. You can even take your family along, but you can only deduct your own expenses.
This is one of the biggest red flags for an IRS audit, but there’s no reason you shouldn’t take the deductions as long as you qualify. Here are the rules.
The area of your home used for business must be used regularly and exclusively:
- As the principal place of business (including administrative use — see below for more details)
- As a place to meet with clients in the normal course of business, OR
- In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence.
There are two exceptions to this rule:
- Storage of inventory of product samples if:
- Inventory or product samples are stored for the business.
- Business is a wholesale or retail business.
- Home is the only fixed location of the business.
- Storage space is used on a regular basis.
- Space used is separately identifiable space.
- The taxpayer operating a day care service in the home may deduct a portion of the dwelling even if it is not set aside exclusively for the business.
As for administrative use, a home office will quality as a principal place of business if:
- The office is used exclusively and regularly for administrative or management activities of a trade or business, AND
- There is no other fixed location where the taxpayer conducts these activities.
If you meet these qualifications, you can deduct a percentage of the cost of operating your home, including utilities, insurance on the home, some repairs, mortgage interest, real estate taxes and even depreciation if you own the home. If you are renting, you can deduct a percentage of the rent payments. Discussing your situation with a tax professional who is well-versed in small business deductions is the best way to ensure you’re getting the deductions you’re qualified for — and not taking any that you don’t, which could hurt you down the road.
Overlooked Business Expenses
Those are the major categories of business deductions, but here’s a list of often-overlooked business expenses:
- CDs, DVDs, books, magazines and other media related to business skills
- Bank service charges for the business account
- Business gifts (deduction limited to $25 per person per year)
- Casual labor and tips
- Office supplies
- Online computer services related to the business
- Parking and meters
- Seminars and trade shows
- Taxi and bus fare
- Long distance phone charges on your personal line
Get Tax Help From a Professional Accountant
If you’re looking for an accountant or tax pro, I can tell you that Jeanie has been a massive help to me personally as I’ve grown my small business. If you’re in the market for an experienced, business-minded and super-nice-to-work-with accountant, give Jeanie a call at 816-525-1411, or visit her website at www.taxjeanie.com for more information. We’ll be back next week with more tips from Jeanie on recordkeeping for small businesses!