Being aware of important tax write-offs for independent business owners is essentials. And regular Counter Culture readers know that we highlighted Congress’ last minute extension of a Section 179 tax break late in December.
We hope that helped you make any late 2014 investments. If not, don’t worry, we’ve got 7 more tax write-offs for independent business owners. People often spend too much time trying to run lots of expenses through their business in order to reduce their taxable income, but they just end up with a lower overall declared income, which can make it hard to sell a business for the right valuation or secure credit when times are tight. Tax deductions let you keep your declared income high, but drastically reduce the overall tax you pay. What’s more, knowing what’s out there can provide some personal perks such as a nice car at a price that won’t break the bank. Before I go any further, I should hasten to add that I am not a qualified accountant, and anyone looking to make tax planning decisions for their business should consult a professional tax specialist. With that being said, here are some deductibles that might be worth exploring.
1. Auto Expenses
Now remember, you cannot deduct personal, living, or family expenses. However, if you have an expense that is partly used for personal and partly used for business use, it’s fair game. You just have to figure out the percentage that’s applicable to each area – business or personal. This guideline is particularly important when it comes to independent business owners and their vehicles. In this case, the IRS suggests that you track and work out the actual mileage spent on each type of travel, personal or business. Here’s a link to the IRS standard mileage rates to help you do the math. You can add onto this, any business-focused parking or tolls that you’ve incurred. Note: Things get a little complicated if you’re claiming accelerated depreciation, or have taken a Section 179 deduction for the vehicle. Also, the rules are different if you have a vehicle that’s entirely for business use and another for personal use. If you only have one car, you can rest assured that the IRS’ powers that be aren’t going to be cool with you claiming it’s 100% for business use.
2. Getting Started Expenses
If you’ve ever started a business, you’ll know that it tends to be a capital-intensive affair. That’s why the great folks at the IRS are cool with you writing off ‘startup costs’ as follows:
- The cost of “investigating the creation or acquisition of an active trade or business.” This includes costs incurred for surveying markets, product analysis, labor supply, visiting potential business locations and similar expenditures.
- The cost of getting a business ready to operate (before you open your doors or start generating income). These include employee training and wages, consultant fees, advertising, and travel costs associated with finding suppliers, distributors, and customers. The ‘investigation’ costs can only be written off if they end in a successful enterprise being formed. Also, you can only write off up to $5,000 in your first year and only if your overall startup costs are less than $50,000. Note: You may be better off ‘holding on’ to some of these expenses, so you can write them off against profits in following years. Again, this is something to speak to your tax professional about.
3. Legal and Professional Fees (& Research Materials)
The fees that you pay to lawyers, tax accountants, or consultants can, as a rule, be deducted. This is one reason why it’s rarely a good idea to skimp on working with high quality advisors – you get what you pay for and you get to deduct it! Any books or research materials you purchase to help with legal or tax affairs can also be deducted.
4. Business Entertaining
Probably the most famously abused of the business deductions, business entertaining is still a hugely important expense for many. If you pick up the tab for entertaining present or prospective customers or suppliers, you are able to deduct only 50% of the cost, if the expense is either: * Directly related to the business; for example, catering a meeting at your office.
- Associated with the business; i.e. the entertainment takes place immediately before or after a business discussion. Record keeping in this area is vital. For each expense, you’ll want to document – and be able to evidence – the amount, the date, the location, and the specifics of the relationship your business has with whomever you are entertaining. There are a lot of relatively complex tools out there, but I’d recommend starting off with a simple note-taking app such as Evernote. Using this handy tool you can take a quick snap of your receipt and then jot down the associated info. Save them all under one project, and hey presto, you have a business expenses folder.
5. Cost of Goods Sold
If your business manufactures products or purchases goods for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold (this is the number you deduct from your gross receipts to figure your gross profit for the year). Remember, if you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring the cost of goods sold.
- The cost of products or raw materials, including freight
- Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
- Factory overhead
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. For additional information, refer to the IRS info on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses.
When you travel for business, you can deduct the cost of plane fare, costs of operating your car, taxis, lodging, meals, shipping business materials, cleaning clothes, telephone calls, faxes, and tips. Some of the exceptions to watch out for here are when you’re combining business and pleasure, taking your family with you, or if the expenses involved could be deemed ‘lavish’. Seriously, I love that that is the term officially used on the IRS website. Please do be careful of excessive ‘lavishness’.
7. Interest and Insurance
If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. The same can be said of the ordinary and necessary cost of insurance as a business expense – if it is for your trade, business, or profession.
Remember, a lot of these expenses can overlap or not be valid for your particular situation, so make sure to consult an expert. Good luck and happy tax season!