Welcome to the FreshBooks Tax Thursdays series! We know a lot of small businesses struggle with taxes, so we’re hoping to help make it a little easier by featuring advice from leading accounting professionals every second Thursday from January to April. Today CPA Chad Shultz walks us through tax write-offs for small businesses in the US.
As an owner of a small business, staying aware of the day-to-day operations of the business is a priority. At this time of the year, however, an owner must also be considering tax strategies for the business and write-offs are key for helping reduce the amount of income tax you need to pay. In light of this, here are 7 essential things to know about writing-off expenses and some common mistakes to avoid:
1. Car Expenses
Using a vehicle for business is quite common; when filling out your return, you will need to calculate the cost of this expense using either the Actual Expense Method or Standard Mileage Deduction.
The Actual Expense Method allows the taxpayer to write off actual out-of-pocket costs plus depreciation if he or she owns the car. Examples of expenses include Depreciation, Licenses, Tires, Loan Interest, Tolls, Gas, Oil, Towing, Insurance, Parking Fees, Registration Fees, Lease Fees, Repairs and Garage Rent. Keep in mind that parking and traffic tickets are not deductible. Also, if the car is used for personal and business, then a percentage of use needs to be determined and the business percentage is what the owner uses for the business write-off.
If you opt for the Standard Mileage Deduction, then track the business mileage and multiply that the IRS rate (i.e., $ .555/mile – July 1-Dec. 31, 2011); the total is the deduction.
To track you might use a mileage log or a smartphone app. An example of a business mileage log includes: Date, Destination, Business Purpose, Odometer Start/Stop and # of Miles. Auto expenses are also tracked with the type and amount spent (i.e., toll).
2. Travel Expenses
Airfare is deductible but if the taxpayer uses frequent flier miles to purchase a particular ticket, the cost of the airfare cannot be deducted. The taxi from the airport to the hotel, as well as transportation costs to go to a customer, including bus and limo costs, lodging, and meals (food, drinks, tax and tip) qualify. Other deductible items include the reasonable cost of cleaning/laundry, tips to the taxi driver, meals, bellhop, telephone costs to your office, receiving a fax, and computer/cell phone rental. These are based on actual costs and not per diem travel rates.
3. Business Gifts
You can deduct up to $25 per person per year, so keep in mind that if the business owner purchases a $30 bottle of wine for a client, only $25 is deductible. Some people also get confused with “gifts” vs. entertainment. If you give someone a ticket that costs $20 to a ballgame as a gift, then you can deduct this. If, however, you code it as entertainment, it may be subject to the 50% rule, making it a $10 deduction.
Make sure receipts are kept for any of the gifts, expenses with notes, showing the date, the person the purchased meal/gift is for, purpose of meeting/gift, and any other pertinent information. Suggestion: scan their receipts, since most receipts are on thermal paper that fades.
The cost to repair business equipment or property is deductible, but be sure you make the distinction between “repair” and capital items. For example, if you replace an air compressor in the business air conditioner, that is considered a repair vs. adding a new air conditioning unit, which is a capital item.
Rent expenses are deductible, along with other terms of a lease (i.e., property taxes.). Many make January rent payments in December. If the business is using cash basis, then it will be deducted with the current year. If the business uses accrual accounting, then it must be capitalized.
Deductible advertising expenses include business cards, print/radio/TV ads, yellow page advertising, package design costs as part of advertising campaign, billboard rental fees and signs on the side of cars/trucks, and PR expenses, including fees, event fees and costs of press kits.
7. Small Expenses (that can add up)
Dues and Subscriptions: Dues for professional, business or civic organizations are deductible (i.e., American Bar Association, American Marketing Association), Chamber of Commerce and Rotary. However, athletic, sporting, airline or hotel membership costs are not, even though they are business oriented. Business and professional publication subscriptions are deductible.
Legal and Professional Fees: These fees, which include legal, accounting and tax prep, and appraisal fees, are deductible.
Bank and Merchant Fees: Bank-related fees, such as monthly, ATM and online banking costs, as well as merchant service fees, including Pay Pal related costs, are deductible.
General Office Expenses: Office supplies, postage, books, cleaning/janitorial services, flowers and plants, snacks and beverages, are all deductible.
For specific information about tax write-offs for your industry visit the IRS.gov Small Business website, where you’ll find information that IRS agents use for examining returns. Another resource is the IRS’ Self Employed Individuals Tax Center.
– Chad Shultz, CPA www.shultztax.com