For all you small business owners, it is time to start gathering the paperwork so that you don’t miss any tax deductions for 2016. Here are some of the most common deductions available:
- Home office – a great way to move some personal expenses under the business deduction umbrella, even if you rent. I know that many think this increases your audit likelihood (though I have never seen any evidence of that) but if you are entitled to it, and have good records, you should claim it. If you want more info on this deduction, send an email to firstname.lastname@example.org and I will send you a brochure describing this deduction.
- Office supplies-even if you don’t claim the home office, you must have bought paper, toner, pens, etc. If you used it for your business, deduct it. Just make sure you keep the receipts.
- Furniture-buy a new desk? Chair? Filing cabinets? Deduct them. Either all at once with a 179 deduction or depreciate over several years to give you deductions in future years when income might be higher.
- Other equipment – computers, copiers, scanners, tools, etc. are also deductible and you also have a choice on whether to take full deduction this year or spread it out over several years.
- Software, subscriptions, trade journals, webinars, reference books, etc. Keep track of these as well.
- Mileage or auto expenses- mileage is an item that is often audited but I think the reason is because it is low hanging fruit for the IRS. People are lousy at keeping mileage records. We provide free pocket notebooks for our clients to record daily trips. There is also a number of apps you can use for your cell phone to keep track of this. Mileage quickly adds up and can result in a very nice deduction. The highest I have seen is about $18,000 for a salesman that had a 5 state territory. OR Sometimes, vehicle expenses provide a better deduction. We usually look at both if we have the data. This includes gas, maintenance, vehicle depreciation, insurance, leases,etc. (multiplied by business use percentage). You are allowed to choose the method (mileage or expenses) that provides the most tax benefit for you.
- Travel, meals, entertainment and gifts – when you are out-of-town for business, the hotel is fully deductible. Likewise, travel by air, car, train or bus is deductible. Note that only 50% of your meals and your clients meals are deductible and you should write client name and business meeting purpose on your receipt. Gifts to clients or employees are deductible up to $25 per person per year.
- Self-employed people can deduct their health insurance premiums. If their spouse or children worked for them they can deduct those as well. Note that the deduction can’t exceed your profit (can’t create a loss). If you are incorporated, premiums may also be deductible but that is much more complicated and beyond the scope of this article.
- Retirement contributions are of course deductible. Anyone can deduct an IRA but business owners have options available to them that allow much higher deductible contributions than wage earners.
- This is not a deduction but it is important. Make sure you are paying self-employment taxes on your business income. Half of this payment is deductible on your 1040 (this is how you fund your social security account for eventual retirement). As your business grows and these taxes become a thorn, there are options available to help reduce the tax burden.
- Pay your kids. You are probably giving them money anyway. If you have something they can do in your Schedule C business that is age appropriate, pay them from your company and deduct it. You must have good documentation for this including pay sheets and a job description. Have them put some of their earnings in a Roth IRA or Education IRA to help show them how to save.
Remember that any unsubstantiated deductions in an audit will be automatically tossed by the IRS. KEEP THOSE RECEIPTS. Some receipts are still printed on thermal paper which fades over time. If necessary, copy onto something more permanent.
I know this work is a pain but think of what you gain. Let’s say you are in the 25% tax bracket. Add in 5% for CO taxes and you will cut 30% of documented expenditures from your tax bill. If it takes you 8 hours to put together $3000 in expenses, you will save nearly $900 in taxes. Calculate the hourly rate. You’ll like it!!!
AFS- your small business tax specialist. USE THE BEST FOR LESS