Tax Day is fast approaching with with personal federal tax returns and corporate tax returns due before midnight of April 15th. It is a time of year many of us have come to dread.

Tax preparation is a migraine-triggering exercise especially if you are one of the 30.2 million small businesses in the United States. Small businesses (defined as businesses with fewer than 500 employees) account for a whopping 99.7% of all business in the U.S. Clearly validing small business is the backbone of the american economy.

While larger companies can absorb the expense of accounting firms or in-house tax specialists to handle their bookkeeping and tax filing work, these avenues are often cost-prohibitive for small business owners and entrepreneurs—many of whom choose to file on their own. Given the complexity of the modern tax code (and the sheer number of tax deductions available to small business), this puts these filers at risk of missing deductions that would save them money.

Steve Nicastro of Nerdwallet lays out this risk in no uncertain terms:

“Failing to claim all the small-business tax deductions you’re entitled to is like flushing money down the toilet. Deductions are a legal way to reduce the amount of business income that is subject to tax.”

Which deductions should you be paying attention to? While you’re probably already aware that expenses for home offices, employees, contractors, commercial leases, and utilities can be claimed, you may be missing some opportunities.

 

1. Startup Expenses

Did you know that you can claim business expenses on your tax return that you incurred before your business officially launched? As long as certain conditions are met, you may be able to deduct up to $5,000 against your first year, with even more amortized over the next 15 years.

New businesses can use startup costs to reduce business taxes, but there are limits and restrictions on these costs.

  • Creating an active trade or business, or
  • Investigating the creation or acquisition of an active trade or business.”
Costs of starting a business can be separated into two time periods:
  • costs for investigating and
  • costs of the start-up.

The IRS allows up to $5,000 in start-up costs in your first year in business. This deduction is restricted if you have over $50,000 in start-up costs. If you have additional start-up costs over the $5,000, you can amortize these costs over 15 years. I

If you are not going to be profitable in your first year, you may want to consider another option to minimize your taxes in years where you make more profit.

Instead of deducting $5,000 in your first year, you may amortize all start-up costs over 15 years, taking the same deduction each year. For example, if your start-up costs are $45,000, you could deduct $3,000 a year for 15 years.

 

2. Personal Mobile Device Use for Business

When you use a personal cell phone for business, the regular monthly expense will not qualify as a deduction. To deduct the expense, you would need to calculate the business-use percentage of the mobile phone on a month-by-month basis.

Adequate documentation could include a log with these:

  • Notes that indicate whether each call was personal or business
  • Business purpose of each call

Also, your cell phone can’t be your primary residential phone. Additional cell phone charges like these are considered business expenses:

  • Charges for business-related long-distance calls
  •  Roaming charges related to those business calls
  • Additional services added specifically due to business needs
  • Plan increases specifically due to business needs

3. Accounting and Professional Services Fees

You may deduct fees paid to accountants, attorneys or other professionals who are independent contractors, for “ordinary and necessary” expenses of your business.

Some typical professional expenses for business startup and organization include:

  • Cost of hiring an accountant or consultant to set up your business accounting system and recordkeeping system
  • Cost for an attorney to help you register your legal entity with your state
  • Cost for an attorney to set up your corporate records and prepare your bylaws, if you are starting as a corporation
  • Cost for an attorney to write your partnership agreement for a partnership or operating agreement for an LLC.
  • Cost for a financial advisor to help set up your new business retirement plan.
  • Cost for an IT firm to set up your business computer and software systems, in addition to cybersecurity and many other pro expertise mentioned in our previous post.

5. Cleaning Supplies

It’s important to know the difference between supplies and office expenses because these costs are handled differently on your business tax return.

  • Record keeping supplies, like invoices and sales receipts
  • Janitorial and cleaning supplies,
  • Bathroom tissue
  • Places to keep supplies, like fixing cabinets and storage lockers
  • Paper plates, paper towels, and plastic utensils
  • Beverages
  • Low-cost office furniture (a used desk, for example) that costs less than $2500.
Note that cleaning services are also deductible but as a Business Expense. If you a solopreneur and work from home, you are only able to deduct the cost of cleaning for your office square footage.

5. Fuel Tax Credit

You can claim a credit for federal excise tax you paid on fuels you used:
  • On a farm for farming purposes (Ex: fuel used to run a tractor while plowing)
  • On a boat used for commercial fishing
  • For off-highway business use. Such as mowers, earth movers, etc. This is fuel used in a trade or business, or in an income-producing activity like a landscaping business.

Also, you might deduct the total cost of fuel you use on Schedule C for off-highway business use or commercial fishing. If so, you must report the amount you claim as income on Schedule C.

 

6. Trade Show Expenses

According to Hurdlr:

  • The registration and lodging expenses you incur attending a convention, seminar, or trade show are generally 100% deductible as long as the event you attend provides, maintains, or improves the skills related to your trade or business. Keep in mind however that conferences you attend for political, investment or personal purposes are not deductible expenses.
  • If you attend a conference outside of the United States, your travel may be fully deductible if your trip is entirely devoted to business activities. A trip is considered devoted entirely to business activities if any of the following is true: You are gone for a week or less (excluding day of departure, including day of return), less than 25% of the time spent on your trip was not related to business, or if you can establish you did not schedule your trip to take a vacation. If you do not meet any of these criteria your travel costs may be partially deductible or not deductible. Refer to our diagram and the IRS for details.
  • If you travel to a conference in the U.S. your transportation (airfare or car), meals (50%), single hotel room and other business expenses incurred at your conference would generally be considered deductible. If you take a personal trip and happened to attend a conference or event while away, you can only deduct the conference fee and other business-related expenses you incurred while at your destination.
  • If you travel with your spouse, relative or friend on business or to a convention you may not deduct any portion of their travel or convention costs unless they are your employee, partner, professional advisor, customer, or other party who joined you for a legitimate business purpose.
  • Make sure to hold on to your conference registration confirmation and any receipts for business expenses incurred while at your event so you can substantiate your deductions.

7. Club Dues

You may deduct costs for dues to professional organizations, and those organizations which you can show are necessary to conduct your business. For example, your dues to the Chamber of Commerce are deductible if you can show that your Chamber membership allows you to promote your business.

You may deduct dues you pay to these types of organizations, as long as the main purpose of the organization is NOT to provide entertainment facilities to members:
  • Boards of trade
  • Business leagues
  • Professional organizations such as bar associations and medical associations
  • Real estate boards
  • Trade associations
  • Personal or hobby clubs
You can also deduct dues to public service organizations like the Rotary or Lions clubs as long as their main purpose is to help communities and not to provide members with entertainment.

8. Party Expenses

While many deductions for food and entertainment expenses saw reductions in the 2017 tax changes, the costs associated with throwing a party that benefits employees and their families can be deducted at 100%!

Be warned, these deductions are explicit in their requirements. If customers, vendors or even friends are part of the guest list, then your party expenses can only be deducted at the usual 50% rate. So be mindful of the requirements and party on!

9. Employee Gifts, Awards and Bonus Payments

It won’t surprise anyone reading these that the expenses for employee recognition awards, bonuses or holiday gifts present a maize of stipulations that can get complex. That being said, you should always consult your tax professional before loading these expenses into your returns.

Business Gifts to Employees

Your business can deduct no more than $25 of a gift to any one person each year, including employees. See IRS Publication 463 for the details.

Gift Cards and Certificates for Employees

 

Gift certificates and the newer gift cards are for the most part taxable to employees because they can be converted to cash. There has been some discussion about whether small amount gift cards/certificates ($25 or less) could not subject to taxes because they are “de minimis” fringe benefits (a small amount) but the IRS has given no guidance on this, so it’s best to consult your tax advisor and to consider them taxable. If you give gift cards or gift certificates, you must withhold taxes from employee pay for these gifts or gross them up.

Bonuses to Owners and Employees

Bonuses for employers/owners are a legitimate business expense and can be deducted under certain circumstances. First, look at bonuses for owners/shareholders:

S Corporations can deduct bonuses for shareholders and owners, as long as they own their shares at the time the bonus is paid.

C Corporations can only deduct bonuses for shareholders/owners who have a 50 percent or higher ownership at the time the bonus is paid.

For sole proprietorships, partnerships, and limited liability companies (LLCs), bonuses are not deductible business expenses because the owners/ partners/members are considered by the IRS to be self-employed. This is one situation in which having a corporation and being an employee of that corporation might result in more tax deductions.

Bonuses to employees are considered income and are taxable to the employee. You must withhold income taxes and FICA taxes on employee bonuses.
 
Complicated, right? Don’t go it alone.
 
 
 

10. Home Office Expense

You can deduct the cost of running your business from your home office. There is a new simplified deduction method for smaller offices. This article on home business office deductions explains how to calculate the deduction.

And, now for the fine print:

Disclaimer
 
This post presents general information and is not intended to be tax or legal advice. Consult with your tax preparer before attempting to deduct business expenses.