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Last minute tax tips: Don’t forget these small biz deductions
April 15th is just around the corner. If you haven’t already filed your taxes for 2018 (or will take an extension), it’s still not too late to get the maximum deduction amount for your business.
“Small business owners sometimes overlook great tax reduction opportunities,” says Eric Tyson, author of Small Business Taxes For Dummies®, Second Edition (Wiley, March 2019, ISBN: 978-1-119-51784-9, $26.99). “Expenses are one area where you can find a surprising amount of tax write-offs for your small business. Don’t miss out on these important deductions when you’re tallying up your final numbers.”
Keep reading for the dos (and a couple of don’ts) of deducting your small business expenses.
Do deduct your advertising. Under this category, include the cost of any advertising that your business does to promote itself. This includes radio, newspaper, Internet, and print ads and promotional brochures and mailers.
Do deduct car and truck expenses. When you use your car for business, the expenses of operating your car are deductible. Compute this deduction by using a flat rate per business mile or by keeping track of actual expenses. Keep a log of the mileage and business purpose of your trips or keep track with one of the popular apps.
Don’t deduct commuting costs (except under certain circumstances). Commuting expenses between your home and office aren’t deductible. These expenses are considered personal commuting expenses, no matter how far your home is from your office or place of work. The cost of parking at your place of business isn’t deductible either.
• If you don’t have a regular office to go to, and you use your car to call on clients, the mileage between your home and the first customer you call on, and the mileage between the location of the last customer you call on and your home, is considered commuting. If your office is in your home, you can deduct all your auto expenses for calling on customers.
• You can deduct the cost of getting from one job to the other if you hold more than one job. But transportation expenses going from your home to a part-time job on a day off from your main job aren’t deductible.
• If you have a regular place of business and commute to a temporary work location, you can deduct the cost of the daily round trip between your home and the temporary job site.
Do deduct commissions and fees. The fees that you paid to sell your merchandise or bring in new clients (as in referral fees) can be deducted. However, if you pay someone who isn’t your employee $600 or more in a year, you have to file Form 1099-MISC with the IRS and send the person you paid a copy of the form.
Do deduct contract labor—but make sure they really are contractors and not employees in disguise. The IRS zeroes in on businesses that pay workers as independent contractors instead of as employees. If someone works on your premises and under your control, she’s probably your employee, and the rules about withholding taxes and Social Security apply. If treating these types of workers as independent contractors is standard in your industry (that is, at least 25 percent of your industry treats them this way) and you issue these workers a Form 1099 at the end of the year, you may have an escape hatch. IRS Publication 1779 (“Independent Contractor or Employee Brochure”) and IRS Publication 15-A (“Employer’s Supplemental Tax Guide”) address the independent contractor issue in greater detail.
Do deduct depreciation. Depreciation is the annual deduction that enables you to recover the cost of an investment (that has a useful life of more than one year) in business equipment or in income-producing real estate. Unless you elect the special provision that allows you to deduct up to $1,000,000 of equipment or furniture used in your business, you have to write off your purchase of these assets over their respective useful lives as established by the IRS. You can’t depreciate land or works of art.
Do deduct employee benefit programs. You can deduct the premiums you paid for your employees’ accident, health, and group term life insurance coverage, but not those you paid for your own health insurance.
Do deduct insurance (other than health). Deduct premiums that you paid for business insurance, such as fire, theft, robbery, and general liability coverage on your business property.
Do deduct mortgage interest. If you own a building in which you operate your company, deduct any mortgage interest you paid (on line 16a). If you’re claiming a deduction for the portion of your home that’s for business, deduct the mortgage interest you paid on line 10 of Form 8829 (“Expenses for Business Use of Your Home”). The amount of the deduction is stated on Form 1098 (“Mortgage Interest Statement”), which you should receive in January from your bank.
Do deduct other interest as well. You can deduct interest on business loans on line 16b. If you took out a mortgage on your house and used the proceeds of the loan to finance your business, deduct the interest here (and not on Schedule A). If you borrowed money for your company from other sources, such as a bank or even your credit card, deduct the interest on those loans as well.
Don’t deduct the interest you paid on the taxes you owed on your personal tax returns. However, you can deduct late interest paid on employment taxes that you paid as an employer (Social Security, Medicare, and withholding taxes).
Do deduct legal and professional services fees. These include fees you paid for tax advice, for preparing tax forms related to your business, and for legal fees regarding business matters.
Do write off office expenses. Enter your costs for stationery, paper supplies, postage, printer toner, and other consumable items that you use in the operation of your office or business.
Do deduct pension and profit-sharing plans. Employers with fewer than 100 employees may establish what’s known as SIMPLE retirement plans. Deduct your contribution to your employees’ SIMPLE or SEP account(s).
Do deduct your rent or lease payments. If you rented or leased an automobile, machinery, or equipment, enter the business portion of the rental payments on line 20a. But if you leased a car for more than 30 days, you may have to reduce your deduction by an amount called the inclusion amount if your leased car’s value exceeded particular amounts when you started leasing it. You can find charts with the lease inclusion amounts for cars, SUVs, vans, light trucks, and electric cars in IRS Publication 463 (“Travel, Entertainment, Gift, and Car Expenses”). Enter rent or lease payments for other business property—your office rent, for example, on line 20b.
Do write off repairs and maintenance costs. A repair (as opposed to an improvement) keeps your equipment or property in good operating condition. Deduct repairs—such as fixing your computer—on line 21. You must depreciate a repair that also prolongs the life of your equipment, so make the most of the $1,000,000 deduction instead of depreciating the cost over its useful life. If you’re confused about what qualifies as a repair and what qualifies as an improvement, contact a tax advisor to evaluate your specific situation.
Do deduct supplies. If your company manufactures a product, you can deduct the cost of supplies that contribute to the operation of the equipment that you use in your office or business. For example, if you operate a retail store, you can write off the cost of mannequins, trim, packaging, and other items.
Do write off travel and meals. You can deduct 100 percent of the money you spent on airfare and hotels for business trips on line 24a. But money spent on room service is limited to 50 percent, unless you work in the transportation industry. Because you can deduct only 50 percent of your meal expense, enter only the 50 percent you’re allowed to deduct on line 24b.
Do write off utilities like electric and telephone bills. However, if you claim a home office deduction, your utility costs belong on Form 8829 (“Expenses for Business Use of Your Home”) instead of on line 25.
Do deduct wages. Wages you paid to your employees are a tax write-off. However, make sure you deduct payments to independent contractors on line 11.
Do deduct “other expenses.” Some expenses don’t fit into the neat categories of lines 8-26 on your tax return. Yet, you can still deduct things like dues, subscriptions to related business periodicals, messenger services, overnight express fees, and so on.
“The time and effort it takes to carefully compile all your deductions is well worth it in the end,” concludes Tyson. “Every tax write-off, no matter how small, will add up to greater savings for you and your business.”