Paying taxes on your business profits is inevitable, but if you know what you’re doing, you can dramatically reduce how much of your income is taxable. Minimizing taxable income is just a matter of knowing what deductions you can count as business expenses.
There are two requirements for the IRS to permit a deductible:
- The expense is necessary: It is both helpful and appropriate for your business.
- The expense is ordinary: It is common in your industry.
Count those miles. As a small business owner, you are able to deduct your automobile expenses for certain trips. This includes driving to customers, clients, and business meetings. If you work from home, trips to and from suppliers are 100 percent deductible.
There are two ways you can calculate your automobile expenses. The first is to track your mileage, and the second is to deduct the exact expenses for things like oil changes, tires, gas, repairs, insurance, and registration. If you do start deducting your actual expenses at any point during the year, you won’t be able to switch back to tracking standard mileage until the next year.
Not everything “bad” is a complete loss. Bad debt is money you have loaned to a supplier, customer, or employee who has failed to pay you back. When this happens, you may be eligible to claim a bad-debt deduction if certain elements exist:
- Loss:The debt must cause you to sustain a loss.
- Worthlessness:You must be able to prove that the debt is uncollectible and that you have already tried to collect it.
- Debtor-creditor relationship:You must have proof of a legal obligation for the debtor to pay you a specific amount of money. This is best done with a written document that outlines the amount of the loan, the interest rate, and the repayment schedule.
You are also able to claim bad-debt deductions when clients or customers do not pay you for services or products you have sold. In order to qualify for this type of deduction, however, you need to use the accrual method of accounting. That means booking income when services or products are sold. You need to have each item documented before being paid, rather than just counting what is earned after payment.
Awards, salaries, bonuses, and benefits such as sick pay, health insurance, and vacation pay are all tax-deductible. This goes for employees to whom you have issued W-2s and for independent contractors who use Form 1099s.
Other fringe benefits for your employees that you may claim as deductibles include:
- Discounts on services and goods
- Country club memberships
- Vehicle use
- Tickets to sports events
Working from home provides a number of deductible opportunities. In order to use your home as a deductible, you must make it your regular place of business or have clients and/or customers regularly visit for business.
Specifically, you need a single area of your home that is “exclusive” for work. This means that if you use your spare bedroom exclusively for work, it counts; but if you watch TV in that room, it doesn’t count. To make it simple, just move the TV out of the room and only keep your essential work supplies there.
Additionally, you must do one of the following:
- Perform the most important aspect(s) of your business there.
- Use your office for management and/or administrative activities while not doing these activities at any other fixed location. These activities include bookkeeping, setting appointments, billing customers, writing reports, and ordering supplies.
The size of your deduction depends upon how much of your home you’re using for your business. You can calculate the size of your claim by:
- Dividing the square footage of your office space by that of the entire house
- Dividing the number of rooms in your home used for business by the number of total rooms in the home:
- This only works if all the rooms are reasonably close in size.
Claiming deductibles for a home business involves more nuances than other deductible types, leaving more room for mistakes and IRS contestation. To keep in the clear legally, reference Publication 587 from the IRS to stay in compliance with tax laws when claiming your home office.
Claim those deductions! This list of possible claims isn’t comprehensive, but making the most of your eligibility takes more than a bit of know-how. To really find savings in every nook and cranny, have a CPA do it for you, or at least provide a consultation.
Call us at (206) 734-6080, send an email to [email protected], or use our Contact page to find out how much money you can save.