When times are tough, every last dollar you can keep is important. In addition to looking at your overall business expenses, you should make sure you are taking full advantage of all tax deductions available to you. Here are some suggestions for keeping more money in your pocket.
Home office deductions are available if you operate your business from your home and have no other primary location. To calculate the deduction, take the square footage of your house, and then measure the part of the space that is used regularly and exclusively for your business (no shared use allowed). If 15 percent of the space is used for business, then you can deduct 15 percent of the home expenses, such as real estate taxes, mortgage interest, rent, utilities, insurance, painting and repairs, as well as depreciate 15 percent of the structure. (Check with your accountant about how to handle the garage, storage shed, driveway and parts of the yard if you use them exclusively for business.) One hundred percent of furniture and equipment used solely for business is deductible. Remember, the deductions are available even if you rent your home instead of own it.
Automobile deductions are available on your truck that you use exclusively for work, but what about the car you use part time? If you maintain a vehicle-use log to determine the percentage used for business, then that percentage of the car’s expenses as well as depreciation can be deducted. If your spouse is using another car to run business errands, have them keep track of the miles. Write down your mileage at the beginning of the year and then keep the log in the car.
Health insurance premiums are deductible to you and not included in the taxable wages of you or your employees if you have a qualified plan. Don’t assume that contribution to the plan will cost too much money. The overall tax benefit may exceed the additional cost. And providing healthcare may attract better employees to your business. Check with your medical insurance agent to see how many employees must participate in order to have a qualified plan.
Meals and entertainment are only deductible at 50 percent of cost, but half is better than nothing! Do you take customers, vendors or employees out to lunch or dinner, to sporting events or to play golf? Save those receipts and write down the business purpose of the event.
Family members on payroll can produce a big tax savings. If your spouse is keeping the books and records for your business, put him/her on the payroll. Hire your kids to clean a jobsite, sort paperwork, help with filing and hand out promotional materials, instead of just paying them an allowance. Use before-tax dollars to get money into their hands instead of after-tax dollars. If you are a sole proprietor and claim these individuals as dependents on your tax return, they are exempt from payroll taxes. (Make sure you set up IRA accounts for your kids so that part of the money can be put aside for their future benefit and also reduce their taxes. It’s never too early to plan for retirement.)
Qualified retirement accounts can save you thousands of dollars in taxes. Investigate the various plans available to business owners — IRAs, Simple IRAs, 401(k) plans. Like healthcare plans, a certain number of employees must participate in order to set up a qualified plan.
Vacation/travel expenses might just be deductible! Do you have vendors in a prime destination spot? Are you attending a construction seminar in sunny California? If the answer is yes, your travel expenses might produce some nice write-offs. And if you happen to have fun while you’re there, all the better. Usually 100 percent of the travel, lodging and food is deductible if there is a business purpose to the trip.
Interest expense attributable to your business may be a better deduction than the interest expense on your house. If you refinanced your home to take money out for your business, keep track of the portion of the interest payments that relates to the business use and deduct that as a business expense.
See IRS Publication 334, Tax Guide for Small Businesses, which discusses a number of deductions available. Documentation is the key to getting the most from your potential tax deductions. Meet with your accountant to review all possible deductions and the best way to keep track of the expenses; the rules regarding these deductions change regularly.