Tax Deductions For Business Owners

Many business owners entitled to tax deductions fail to take them.

The usual reason is failure by the business owner to document the basis for the deduction. Unless you can do that, the IRS may successfully challenge you. With the New Year upon us, now is the time for business owners to maximize their deductions by setting up systems to document and track them.

What kinds of deductions available to business owners?

Auto Expenses. According to some experts, this is an underused deduction. If you use your car for business purposes, you can deduct the cost of use by miles or your actual expense in purchasing or leasing a vehicle. Keeping track of your mileage is a bit tricky since it involves keeping records of travel to and from a place for business purposes every time you travel. However, there are now some cool phone apps that make it much easier. One is Xpense Trkr, which even automatically calculates the distance from one address to another. If you commute to another location for your business on a regular basis, it becomes easier to track. Simply figure out the round-trip mileage for the year and multiply it by the current mileage reimbursement rate of 56.5 cents for business miles and you have the amount that can be deducted.

You also can deduct the portion of your car insurance, tolls, parking and car rental expenditures directly related to your business.

If you purchase a vehicle to use only for business, that’s easy. But, be aware the IRS may be skeptical of your claims that you use the vehicle 100% for your business. Make sure you can back up the “only used in business” claim if that’s the one you are relying on. How? If you use your personal vehicle to go to work and pick up the business vehicle for work purposes so that the business vehicle is parked at the business and not used to transport you to and from your home, that vehicle is clearly used only for the business.

If, as is most common, the vehicle is used for both business and personal use, track the usage to ensure you have documentation backing up your percentage use for business versus personal purposes.

  • Home Office. Working from home has tax advantages if part of the home is dedicated exclusively to the business. See IRS Form 8829 for methods of calculating the percentage of a home used for a home office. The experts may warn you against using a home office deduction simply because the IRS tends to challenge these deductions – not because they aren’t legal, but because people cannot provide their use of dedicated office space in the home. Working at a laptop at your kitchen table does not a home office make. However, if you have clearly dedicated a space to use for an office and can prove that to the IRS, then the deduction for that portion of your home (including the deduction for the portion of your home insurance, mortgage interest, repairs and depreciation) is entirely appropriate.
  • Equipment and Furniture. Computers, printers, desks, other office equipment, all can be deducted by business owners. IRS Publication 587 sets for the procedures used to claim furniture and equipment including he “more than 50% use test”, depreciation and recordkeeping.
  • Office Supplies. Yes, your business cards, printer inks, pens, envelopes and folders are deductible. So is the cost of setting up your web site, maintaining your Linked-In or Facebook presence, etc. Your receipts for these purchases are all you need to maintain for backup.
  • Fringe Benefits. Health insurance, dental insurance and related perks may be tax deductible. Health insurance expenses are 100% tax deductible, but are not allowed if you were eligible for your spouse’s health plan. So, if you are a business owner with no other alternatives except to purchase your own health insurance, you can deduct 100% of the cost.
  • Utility Costs. A cell phone or telephone used exclusively for your business is deductible. That includes buying a new cellphone or deducting your regular cell phone or landline bills. That’s an easy one. But, how about if you use the cell or landline for both personal and business purposes? Again, you can apportion the usage if you have some sort of backup. Let’s say you have dropped your landline (as many have) and now rely exclusively on your cell phone for business purposes, and you have a business card that recites your cellphone number. Hard to argue that the calls you make and receive on that cellphone are not business related.
  • Travel Expenses. Travel expenses including airfare, hotel, train, bus, car rental, even tips to hotel people, are deductible so long as you have receipts for your expenditures. Remember that the costs of multiple trips to Maui for “business” purposes can only be deducted if you can prove the business purposes.
  • Retirement Planning. Legal fees for business planning, retirement planning, business succession planning, tax planning, estate planning, all can be deducted by the business owner if business related. If you fund your own retirement plan, those funds can be deducted.
  • Educational Materials. Books, magazines, subscriptions to online services, costs of courses taken to improve your business skills, costs of seminars, webinars, etc. all can be deducted if they have an educational purpose.
    How can you to document your business expenses?

There are many software and online services available now (deduct the cost on your taxes as well) including Quickbooks and FreshBooks. They may also offer phone apps that allow you to snap photos of receipts and other documentation. Stand-alone phone apps like Xpense Trkr also allow you to record receipts then email yourself Excel spreadsheets to make keeping track of expenses a breeze.

If you’re not high-tech, your best move is to keep a logbook. Keeping track of all your business expenses in one place makes the most sense. Absent that, try manila folders for each category of deductions – simply throw your receipts into the appropriate folder and tally up at tax time.

To find out more about deductions, check out the IRS website or any number of other online resources. Remember, if you own a business, you are entitled to take tax deductions related to that business. Make maximum use of these deductions by documenting them.

About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.

Lyn & TeddyAbout the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.