With so many big companies evading the U.S. treasury by taking advantage of tax shelters and payment loopholes, small businesses, too, want to shave a few percentage points off their business tax rates. But those who can’t afford to pull the “double Irish” or hire a team of tax attorneys to fully exploit the system’s weak points may be ignoring the deductions for which they are eligible.
Instead of looking to game the system, small businesses should do all they can to work within it and focus on their business tax deduction. Yes, storing all those receipts takes up closet space; and no, no one ever referred to sifting through old purchase slips as a “fun Saturday night.” But keeping a regular cadence with your business’s paper trail is the best way to grow your list of deductible expenses.
Here are four tips for doing just that:
1. Deduct Home-Office Expenses
Most owners can’t stop working once they leave the worksite. That usually means some kind of home-office setup.
Calculating your home-office deduction is surprisingly simple:
- Pull out a yardstick and measure your work area.
- Divide the square footage of your office by the square footage of your home.
- The resulting percentage is the fraction of your home payment (including utilities, maintenance costs and property taxes) you can claim for the deduction.
Other Home-Office Tips:
- Create a clear separation between your workspace and the rest of your home. A home-office can be a room of its own, but if part of a larger space it should be distinctly separated from your living area.
- Use your home-office for work purposes only. Don’t store personal items or use it as a bedroom for guests or a playroom for children.
- Deduct computers used only for business work. Don’t claim your personal computer as a business expense. If you have only one computer in your home, you should not claim it as a business expense even if you use it for work.
2. Deduct Overhead Purchases
The IRS rewards business capital investment. The acquisition, installation, use, depreciation and sale of eligible property all factor into the business-tax equation.
For further detailed instructions, refer to Section 179 of the U.S. tax code to learn about eligibility, limits and restrictions on business expense deductions for equipment such as computers, cell phones, copy machines or company vehicles.
RELATED: How Much Time Payroll & Payroll Tax Administration Are Really Taking You
3. Deduct Travel Costs
Videoconferencing may have brought the virtual meet-and-greet mainstream, but nothing builds trust like an old fashioned, real-world handshake — and the tax man agrees.
Many travel expenses are tax deductible, such as:
- Airfare.
- Hotel payments.
- Car rental, even if it is a luxury car rental in Dubai and mileage costs.
- Associated travel expenses; e.g. parking and laundry costs.
- Industry-specific conference fees if the event directly relates to your business.
You can also deduct half your travel-related food costs. Why half? The IRS figures that although you’d still be paying for food at home, a partial food deduction for business meals is fair as travellers lack kitchen access and dining costs are usually higher.
Document work travel expenses as they occur by having employees use expense tracking software, corporate cards or a per diem setup. Employees should disclose, document and organize travel costs by having a system in place for submitting expenses in a timely manner.
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4. Keep Proof of Everything
The burden of proof will be on you, the taxpayer, to prove the validity of any deduction. Keep whatever you need in order to prove your deductions were indeed legitimate business expenses. File receipts as they are collected; don’t wait until tax time.
Ways to organize as you go:
- Separate invoices from receipts. Invoices request estimate a payment, whilereceipts prove payment was made and received.
- Digital receipts are easily saved as computer files or sent by e-mail. Upload important digital files to a cloud backup service so that receipts are not lost if your equipment is stolen or destroyed.
- Paper receipts should be secured in a single location. You can also scan or photograph paper receipts and store them with your digital files.
Don’t Walk Out of the Casino With Money on the Table
The thought of dealing with the IRS is enough to make anyone hesitant to press for fewer taxes, but worrying about an audit should never keep business owners from claiming legitimate deductions. The IRS might not go out of its way to help small businesses aggressively tamp down their tax burdens, but they’re bound to honor the process when they’ve done the job of documenting expenses and filing the right way to lower their tax bills.
If you found this article helpful, may we suggest:
- For more on avoiding small business taxes, read Avoid the Cadillac Tax by Adopting Voluntary Benefits.
- For more on finding the an reliable tax filing partner, read 13 Questions You Should Ask to Find an Honest HR Outsourcing Company.
- For more on increasing your business 401k return on investment, read 3 Ways to Max Defined Contribution Plan ROI.