UPDATED: 9/19/18 – Meals and entertainment should no longer be kept in one account together. More details below.
Knowing what expenses are tax deductible is crucial to ensuring the success and longevity of any business. Yet surprisingly, year after year, numerous business owners are overpaying taxes by hundreds and even thousands of dollars, by overlooking all of the various tax deductions for which they would have been eligible.
In most cases, business owners are simply not aware of the tax deductions that are available to them, while others tend to shy away from the complicated number crunching and itemization involved in claiming such deductions. These are habits that can be extremely costly for a business in the long run. So what exactly is a business able to deduct on their taxes? You may be surprised by the answers.
It’s fairly common knowledge that the purchase of a new vehicle for business purposes is a great tax write-off. But what you may not know is that you can also claim vehicle upkeep for the duration of the vehicle’s life, and we’re not just talking about gas and oil changes here. We mean ALL upkeep – this can include everything from general repairs and maintenance to car washes. Did your business vehicle get a new paint job last year? Deductible! Added some tint to your business vehicles windows for a more stylish looking ride? Deductible! Have you had to pay for parking or freeway toll fees? Guess what, that’s deductible too! We are already talking about thousands of dollars in expenses every year, all of which can be written off! In short, if the expense involved is associated with an improvement to the business vehicle, it can be deducted.
Business related meals
Things such as client dinners or entertainment outings can easily rack up thousands of dollars throughout the year, especially with network-heavy businesses. Prior to the tax reform that took place in 2018, these expenses could be written off for tax purposes. Now, meals may be 50% tax deductible but entertainment should no longer be grouped into the same account that used to be referred to as “Meals & Entertainment.” It’s much better practice to have separate accounts for each of these expenses as they are now treated differently when it comes to tax. With meals, as long as you have receipts and documentation of the business purpose, it is highly unlikely that the IRS will give you a hard time over it. Just make sure that the expenses are within reason – a trip to Tahiti for dinner may raise more than one red flag.
One of the most common deductions that business owners miss is also one of the most substantial – startup costs. Most business owners are often not aware that the very expenses that have been put into getting their business off the ground can be deducted once the business starts. This can include business cards, promotional ads, computers, cell phones etc. In fact, you can even deduct items that you purchased before you started the business (such as a computer) as long as you can prove that it is now being solely used for the business. For example, if you started a new business in 2014, and are using the laptop that you purchased in 2012, you can deduct the value of that laptop from the time the business starts logging sales. Note that there are some instances where startup costs may not be claimed during your first year of operation, but as long as your startup costs are under $50,000 you can write off up to $5,000 in startup expenses in your first year and amortize the remainder of the costs over the next 15 years per IRS code, offsetting future income. This is a prime example of why keeping receipts for large purchases regardless of whether you initially intended to use it for business reasons is so important. It is also important to note that when it comes to claiming a business deduction, credit card statements may not be considered proof of purchase by the IRS. This is because only the store where you purchased the item, and the amount charged, will show up on you credit card statement; it will not show what item was purchased.
Keep ALL receipts, even the small ones
Despite what some people may think, the IRS does not target or look down on businesses that claim deductions – in fact, they expect it. However, if and when the IRS decides to audit you (which is pretty much guaranteed to happen at least once throughout the lifetime of your business), you will want to make sure that you have each and every receipt on hand to back up your claim. Many business owners make the mistake of only keeping receipts associated with larger expenses, as they believe that the IRS is more concerned about the large-scale deductions than they are the smaller sized ones. However, this couldn’t be further from the truth. When it comes to an IRS audit, the $50 receipts are just as important as the $5,000 ones.
Thanks to various advancements in technology, paperless record keeping is becoming an increasingly popular way to safely store important documents. Relying on paper invoices and receipts only increases the risk of these documents being misplaced, damaged, or lost – a scenario that can prove to be not only stressful but costly as well. This is where getting into the habit of scanning receipts and storing them either on your computer or in the cloud can save you a whole lot of headaches down the road. It can also save you time (as well as money) when it comes to your accounting needs. Today, in our virtual accounting world, businesses have access to a more flexible way to take care of their bookkeeping, tax and payroll needs. This is often less expensive than hiring an accountant in-house to physically work in the office. Should you decide to go this route, it is likely the accountant will prefer that all of your important receipts and documents be provided to them virtually as opposed to being provided with the original paper documents. This will offer efficiencies in their service as they are also paperless and cuts down on turnaround time, solving logistical issues of providing those files to them in other formats. Just one more reason to consider going paperless – it’ll make providing data to your virtual CPA or bookkeeper that much easier. If you’re considering the benefits a virtual accounting firm can offer, then why not contact us today, to see what deductions your business could benefit from? One more benefit you may not have considered – they’re tax deductible too!