Most small businesses have two simple goals during tax season: pay as little as possible if money is owed, or to increase a tax return refund. Accomplishing this requires businesses to be aware of all eligible tax deductions; however, this is easier said than done. Some everyday expenses businesses typically incur are actually tax deductible, but are often overlooked.
In order to be deductible expenses must be ordinary and necessary. An expense is ordinary if it is a common and accepted part of the particular business’ day-to-day activity. An expense is necessary if it is appropriate and helpful to the taxpayer’s business.
This is a vital distinction because potential deductions can save significant tax dollars. Here are some examples of expenses business owners are entitled to but may be neglecting to take advantage of, or that they may be omitting altogether:
Business use of auto: A business may expense mileage (57.5 cents per mile for 2015 and 54 cents per mile for 2016) or actual auto expenses (gas, repairs, insurance, auto excise tax, registration, car washes, detailing, loan interest if self-employed and any other expenses/supplies to operate your vehicle) multiplied by business use percentage (plus 100 percent of parking and tolls). Keep in mind, the IRS requires a contemporaneous log. Driving to work is considered commuting and cannot be deducted unless the employee is working out of his or her home.
Meals and entertainment: Is your company providing meals for employees while traveling or entertaining a client? These expenses are actually 50 percent deductible. Remember, the activity must be directly related to the active conduct of trade or business and meticulous records must be kept, such as receipts. Reimbursements to employees for business meals and entertainment should have a written company policy on maximum meal reimbursements and a maximum percentage for tips. It should not be unlimited.
Dues: If the business belongs to a professional or public service organization, these fees are deductible. However, organizations that a company participates in for pleasure – whether it’s business, social, athletic, luncheons, sporting, airlines or hotels – cannot be claimed or deducted.
Health insurance: Health insurance payments are 100 percent deductible, regardless of the type of entity under which you operate your business (self-employed, incorporated, partnership or LLC).
Credit card charges: If you have credit card charges for business purposes, they are deductible when incurred, not when paid. For example, if you have credit card charges in December 2015 and they are not paid until January 2016, they are deductible in 2015.
Retirement plan contributions: Contributing to a retirement plan is highly recommended for two reasons: first, it defers your tax liability, and second, it helps you save for retirement. Additionally, if you are matching or contributing to your employee’s retirement plans, these expenses are deductible.
Gifts: If a company decides to give gifts to clients, candidates or referral sources these may be deducted. Be aware, however, that only one gift per recipient per year may be claimed.
Section 179 depreciation: Section 179 of the Internal Revenue Code allows a taxpayer to deduct the cost of certain types of property in the year purchased, as opposed to depreciating the asset over time. This property is generally limited to tangible, depreciable, personal property used in the active conduct of business.
Operating a business from your home: If a business operates from the home of the owner, there are even more deductions for which the company may be eligible. For example, the company may qualify to claim a home office deduction. In order to qualify, the home office must be the principle place of business and the office must be a room used exclusively for business.
Deductible home office expenses are calculated by taking all expenses and multiplying them by the business use percentage, which is business square footage divided by total square footage. All expenses incurred in order to operate from a home include, but are not limited, to:
- Mortgage interest and real estate taxes if you own a house.
- Rent if you do not own a house.
- Homeowner’s insurance or renter’s insurance, repairs and maintenance, utilities, cleaning services, cleaning supplies, trash and snow removal, pest control, alarm monitoring services and home office furnishings.
Taxes don’t have to be complicated. Business owners just need to know what deductions they should be looking for and where to find them. Thinking about taxes all year long and encouraging employees to keep careful records of expenses incurred while working will make filing quick, painless and less costly.
Bob Fineman, CPA, is the owner of Robert S. Fineman P.C. and a member of the Massachusetts Society of Certified Public Accountants. This article first appeared in the Spring 2016 issue of Massachusetts Family Business, the magazine of the Family Business Association of Massachusetts.