Be Sure You’re Maximizing Your Allowable Deductions

Are you preparing for your next business or corporate income tax return? As a business owner, your budget plan should include expenses that qualify as IRS allowable deductions from business income.To meet the requirements under IRS regulations, a business expense must be considered both ordinary and necessary. What exactly defines ordinary and necessary expenses? In general, all reasonable expenses paid or incurred during the taxable year in operating your business. Specifically:

• Ordinary business expenses: Costs and services commonly accepted in a particular trade or business. Some expenses might apply to any business: rent, insurance, advertising, the cost of employees, etc. Other expenses may be applicable only to certain industries: a lawn care service could easily justify the need for a chain saw, but this wouldn’t be an ordinary expense for a hair salon.
• Necessary business expenses: Costs for items helpful or appropriate in operating your trade or business, although not necessarily indispensable. While not a critical asset to your business, a lawn service may be considered a necessary expense for many organizations: a pleasing façade reflects a prosperous company, while encouraging visits from clients and prospects.

Allowable Deductions:

• Vehicle use may be an ordinary and necessary expense, but you must maintain good record keeping to claim the deduction. Personal mileage and expenses are never deductible as a business expense, so if your vehicle is used for personal trips as well as business, the expenses must be allocated between them. Deductible mileage includes miles driven from one job site to another or miles driven to meetings. Commuting to or from your office can’t be included.

Car expenses can be deducted either by using the “Actual Expenses” method (saving your receipts and allocating a percentage to business) or by the “Standard Mileage” method (an allowance per mile driven). Don’t take both!

• Business travel deductions can be incurred only when you’re traveling away from your “tax home.” Meals eaten at restaurants in town don’t count. Even when you’re away from your local area, meals can’t be extravagant and deductions are limited to 50% of the meal expense.

The IRS offers two options for deducting business meals: save your receipts and use actual expenses or use the standard meal allowance.

IRS Publication 463 offers more specific guidance related to Travel, Entertainment, Gift, and Car Expenses. The Tax Cuts and Jobs Act (TCJA), however, made a significant difference in deductible entertainment expenses and, as of this writing, specific IRS guidelines have yet to be released.

• Your Office in Home may be deducted only if used regularly and exclusively for business and as your principal place of business. Note that “exclusive” means exclusive! If you also use the room as your den/TV room, etc., it no longer qualifies as an office. The principal place of business criterion is a little more flexible: if you travel to client locations throughout the day but your administrative work takes place in your office, it counts as your principal place.

You can use one of two options for deducting home office expenses: the regular method requires tracking your actual expenses and multiplying by the percentage of your home that your office occupies. The simplified method allows you to take a deduction of $5 per square foot (up to 300 square feet).

Note that under TCJA, the home office deduction essentially becomes limited to self-employed taxpayers. Company employees who are expected to work from home, and would deduct those expenses as miscellaneous itemized deductions, no longer hold that option as those deductions were eliminated.

The IRS also offers resources for small businesses and self-employed taxpayers, including a nine-lesson video, The Virtual Workshop. You don’t need to watch all four hours; the video is divided into useful sections so you can pick and choose the areas specific to your business.If you prefer to focus on your business and let a professional handle your tax accounting services, consider using the seasoned tax professionals at Patrick & Raines CPAs. Contact us at Office@CPAsite.com or 904-396-5400.