Most Overlooked Business Tax Deductions

MOST OVERLOOKED BUSINESS TAX DEDUCTIONS

Before we get into discussing some of the business tax deductions you may be overlooking, here is some information about tax refund delays. In 2012 the IRS collected almost $250 million because of the Delinquent Return Refund Hold Program. Under this program, the IRS can hold refunds for up to six months while investigating possible return delinquencies for prior tax periods. This program has at least two benefits for the government: 1) if the taxpayer is found to owe for prior periods, the IRS applies the current refund against the old balances, and 2) statistics show that tax refunds held back encourage taxpayers to be significantly more likely to attempt to resolve these outstanding tax debts. To me, it seems like something that should have been done all along. What sense does it make, for example, to give a refund to someone who already owes you money – whether it be the IRS or any of us who operate businesses? If you had a customer who owed you money and for some reason the person had a refund coming for another reason, wouldn’t we all be inclined to offset the refund against the balance due? There are so many areas where the IRS is either just now catching up or is still operating in the 20th century. I believe we will see continued (and perhaps expanded) use of this program.

 OK now on with some deductions you should consider taking if you are not already taking them:

 

  • Bank services charges on your business checking account, including overdraft fees – however, if you have more than a very occasional overdraft fee, you should speak with your banker about how to keep this from happening
  • Contributions that promote your business to customers and potential customers might very well be deductible advertising expenses and not non-deductible contributions
  • If you convert personal assets to business use, you are entitled to take depreciation deductions for the Fair Market Value on the day they were converted
  • While deductions for business meals are usually limited to fifty percent, certain of these expenses can be deducted at 100% (company parties like Christmas parties or picnics, meals provided to employees for the convenience of the employer, meals provided in your home if the purpose is to promote business sales). If your business is regulated by a department of transportation (e.g. over-the-road truckers) you are allowed a higher percentage deduction if you use the government per diem rate
  • General circulation publications are usually NOT deductible. However, if you have them addressed to your office and make them available to your customers (patients, clients, etc.) in a waiting room, they are deductible
  • When you travel over night to a destination where you have family or friends, consider staying in their home and pay them what it would have cost you to stay at a nearby hotel. As long as they do not rent out space in their home more than fourteen days a year, they will not have to report the income and you still get the deduction. However, make sure you have a written receipt and cancelled check as documentation
  • If you hire your children, under the age of 18, in your business, there are significant tax advantages. No social security withholding or matching is required. You do not have any liability for unemployment compensation (until the child reaches age 21)
  • You might also consider hiring a retired parent who needs extra retirement income. The parent is likely to be in a lower (perhaps much lower) tax bracket. In essence, you are helping your parent financially and getting a legitimate tax write-off in the process
  • Home office deductions can provide numerous tax benefits IF you know how to maximize them. DO NOT use the new method suggested by the IRS – it will cost you money. You need to invest the extra time it takes to CORRECTLY calculate the total square footage of your home AND the business square footage. Remember, the greater the business area and the smaller the total area of your home, the greater the percentage of your home expenses that can be taken against your business income.
  • If your home business loses money, your home office expenses will be severely limited. However, you need to be aware of the benefits of utilizing unused expenses to reduce taxes in future years. In other words, if you are not able to use the total home office expenses allowed for this year, the unused portion is carried to subsequent years when you do show a profit. I had a client a few years back who had accumulated well over $10K in these unused expenses. Then she had a really good year and feared she would owe significant tax dollars. However, we were able to apply all the carry-over expenses against this high-profit year. Not only did this reduce her income taxes, it also reduced her income subject to self-employment taxes. She was very pleasantly surprised to learn that she owed very little in taxes because of the carry-over of these expenses.
  • AND, using your home as your office, if you don’t itemize your personal deductions, you still get to deduct a portion of your real estate taxes and mortgage interest. This is tantamount to a double-dip benefit because you still get the standard deduction, and it’s perfectly legal.
  • When you travel out of town, pre-planning is essential. In almost EVERY situation you can turn what might have originally been planned as personal (non-deductible) travel into fully deductible business travel
  • Hiring your spouse in your business allows you to adopt a medical reimbursement plan. If you have no other qualifying employees, you can set the plan so that your business reimburses your spouse for 100% of the entire family’s medical expenses (including yours as the owner of the business), including health insurance costs. (One caveat here, if there is health insurance cost involved, make sure the insurance policy is in the name of the employee spouse.)

This is not an exhaustive list of business expenses you are legally allowed to take. However, you should certainly at least take a look at how using these approaches could reduce your tax burden. Remember, if you run a profitable business, you are automatically subject to 15.3% self-employment tax AND your business profit is added to all other taxable income. As we have discussed before in this column, this S/E tax, plus federal and state income taxes can easily amount to 50%, or even more, of your total income. That means that if you can increase your deductible business expenses by say $10K, you would save up to $5K – and this would likely continue year after year.

 Remember, good bookkeeping records are essential if you are planning to take better advantage of the tax laws that allow these deductions.

 Please also keep in mind that our other specialty is helping people with tax problems. If you know of folks who are having IRS problems, we would appreciate if you would refer them to us. I can promise you will be a hero because we have an excellent record of helping people recover their financial future by resolving tax problems.

 Defending our fellow citizens against their government by making sure the IRS obeys the rules. Find us at – www.buckcpa.com.