In this quick blog post, we are going to seek to answer the age old question: what are tax deductions. We will be covering this from both a personal and a small business owner (SBO) perspective, with an emphasis on small business tax deductions. We will also discuss the difference between business and capital expenses, and tips on how to avoid a tax audit by the IRS.
What is a Business Expense
Business expenses are defined in the following manner” any expense or cost associated with doing business or obtaining new client business. This includes a wide array of items, including business travel, the rent for your business property, dinner and entertainment costs for client meetings, and so forth.
What is a Capital Expense
Capital expenses, on the other hand are fees and costs for purchased business assets, including computers, printers, fax machines, furniture, and so forth. Depending on a number of factors – as outlined in the IRS Section 179 deduction explained – sometimes you are able to deduct or write-off a capital expense in its entirety – other times, you must write off a percentage – known as depreciating.
Common Business Tax Deductions
Below is a list of some of the typical business expenses a company can write off to lower their taxable income/revenue.
While not all automobiles meet the requirements for deduction, there are some instances where this applies. If you use your car for business purposes or if your company owns the car and it is not solely a personal vehicle, then it may be eligible.
There are two ways you can claim your vehicle expenses – actual expense and standard mileage rate. Actual expense rate means you will need to make note of any business-related use – standard mileage let’s you deduct a set amount per mile you drive, plus tolls and parking fees – not traffic violations though! Maintenance fees can also be deducted, such as oil changes, repairs, and so forth. Note that you will need to keep a log of (at the very least) mileage, gas, and repair bills and that only a portion of that (there is a calculation your CPA or tax professional can tally for you) is deductible.
Employee Wages and Benefits
Another thing you can deduct is the amount you pay your employees in fees, and benefits, including health coverage, life insurance, and even education assistance. In addition, you can deduct contributions to employees’ 401k, profit-sharing, and pension plans as well.
Advertising, Marketing, and Search Engine Optimization
Advertising and marketing comes in all shapes and sizes. It includes everything from website and social media promotion to radio spots and Yellow Page ads. Heck, even business cards are a form of advertising. Don’t forget to tell your CPA a tally of all your advertising, SEO, and marketing dollars spent for the year.
Travel and Entertainment Expenses
Most small business owners are aware that they need to keep track of travel and entertainment expenses, such as hotel costs, airfare, gas, mileage, meals, and any shows they take a potential client to. Some lesser known items include wifi coverage (think hot spots), and even dry cleaning bills. So while you are out gallivanting around, don’t forget to save your receipts!
Any courses you take for your business, books or magazines you purchase for the same purpose, and even seminars you attend are all tax deductible as well. If you have to travel for that seminar or course, those expenses are covered as well.
Office Supplies and Equipment
This probably goes without saying, but any office supplies you purchase (pens, paper, staples, etc) and any office equipment (printers, computers, phones, and so forth) are all tax deductible as well.
Don’t Go Overboard
A great CPA (Certified Public Accountant) or tax professional will know how to avoid raising red flags with the IRS that could lead to a potential audit. For instance, claiming an excessive charitable contribution that is far out of line with your income, or taking a client out for a $10,000 dinner when you might only earn $1,000 in business, are all actions that will make the IRS and its auditors raise an eyebrow of suspicion.
If you have doubts or are seeking advisement from a qualified CPA, or need a consult on how to strategically grow your business, why not give Clayton, Paulk & Associates a call? We would love to hear from you!