It’s crunch time! Have you gotten your taxes in order?When you file taxes as a solo business owner, things are more complicated than those days when you may have a received a tax form (W2 in the US) from a single employer. However, flying solo, you’ve also got plenty of opportunities to trim your tax bill.
With that in mind, we outline tax time tips for all home-based, small business owners.
Keep in mind, these are general tips and aren’t meant to replace the individualized advice of your tax accountant or CPA.
1. Understand What’s Deductible for Your Home OfficeTo qualify your home office as a legitimate business expense, it’s got to be a place that is used exclusively for business activities.
If your kitchen table doubles as your work desk, you won’t be able to deduct it. But, if you’ve got a dedicated room for an office or even a portion of a room, you’ll be able to deduct some of your housing costs.
In the past, you had to calculate percentages for a deduction. But since 2014, home-based business owners use a simplified method. You can claim an amount per square foot of the office, up to a maximum square footage. Ask your tax professional for specific amounts.
You may have heard that the home office deduction is a big red flag and the IRS is more likely to audit self-employed professionals who take advantage of it. However, if you’re legitimately entitled to the deduction, take it. It can be one of your most significant annual expenses.
Form to keep handy: Form 8829: Expenses for Business Use of Your Home
2. Deduct Some of Your Home UtilitiesIf you’re taking a home office deduction, you’re also able to deduct a portion of your utility bills—namely your monthly heating and electricity bills.
In this case, you deduct a percentage of your square footage that serves as office space. You can also deduct some of your broadband/Internet bills, but you’ve got to take into account that you most likely use your home broadband for non-work purposes as well.
There are options for taking a standard deduction for home based business or an option to itemize deductions and that can be better explained by your tax professional too.
3. From Paper to Tablets, Expense Office SuppliesDon’t forget all the paper, ink toner, postage, paper clips and other supplies that you purchase. These are all fully deductible (provided you prove you’re using them for your business).
How about your new computer or iPad? These can also be deducted. However, keep in mind that if you only have one tablet or laptop, you’re also most likely to use it for personally as well. In this case, you can only expense the percentage of how much the equipment is used for business (i.e. 50% or 60%).
Form to keep handy: Publication 535 Business Expenses
4. Claim Home Office UpgradesIf you’ve been thinking about a new desk, office chair, bookcase, desk lamp or other office furniture, keep in mind that these are all allowable deductions.
Trying to expense a new painting might be a stretch unless you bring clients to your home office.
There are two ways to claim a deduction: all at once in the year when you made the purchase or gradually over the life of the property (known as depreciation deductions). These types of deductions should always be discussed in advance with your tax or financial advisor.
Form to keep handy: Pub 946: How to Depreciate Property
5. Save Money on Business Trips and TravelDid you attend a conference this year? Do you travel to meet a client (and aren’t reimbursed for those costs)? If so, you can deduct these expenses. Here’s what you need to know:
Form to keep handy: Pub 463 Travel
6. Understand Mileage DeductionThis might be one of the hardest to decipher deductions in the tax system and one with the most questions.
If you’re working from home, you obviously can’t deduct any kind of daily commute—you also can’t deduct your morning trip to the local coffee house (no matter how necessary it might be!).
But if you travel to meet a client, perform a job outside the home, purchase business supplies, conduct research or do any other kind of activity for your job, you can deduct this travel. That includes a standard mileage deduction (or public transit fares), parking and tolls.
There are two (2) tools our clients use and ones we recommend for tracking mileage. The first is the Quick Books app for the self employed. It comes complete with automatic GPS tracking, organizing expenses and won’t drain your battery! The second is a paid app called MileIQ, and once MileIQ is installed it works in the background – there are no buttons to press to start or stop. Your miles are automatically logged and recorded creating a complete record of all your tax deductible and reimbursable mileage.
Keep in mind that commuting to your 1st appointment for the day is considered only that a commute and cannot be used for mileage deductions. But as a rule of thumb, when preparing your mileage for your tax professional, make sure to double check this with them.
Form to keep handy: Pub 463 Travel
7. Client Lunch Dates… You Can Expense ThatTaking a client out for lunch is a time-honored tradition, but it also causes its fair share of tax confusion. First, you can only deduct 50% of the meal, not the entire bill.
More importantly, the IRS is on the lookout for excessive or extravagant deductions. You’re going to run into trouble if you think you can fly a client to Barcelona for tapas or try to expense a $300 bottle of Cabernet with lunch.
Here’s what does work. Bringing a new client to lunch to finalize your contract. Let’s say the meal came to $74 including tips and taxes, so you are able to deduct $37 as a business expense. Remember to keep the receipt and on the back, jot down the date, the client’s name, as well as a few notes on the business matters discussed.
For potential changes to this rule for 2018, please wait for our April 23rd blog!
Form to keep handy: Pub 463 Entertainment
8. Know the Rules of Health InsuranceSelf-employed individuals (including sole proprietors) may be able to deduct the cost of health insurance for themselves and their family.
However, you can’t deduct your insurance for any time when you’re able to participate in an employer-subsidized plan (i.e. through your spouse or partner).
Form to keep handy: Publication 535 Business Expenses
9. Consider a Tax-Deferred Retirement PlanI know that for many small business owners and freelancers, especially those who are just starting out, the monthly cash flow can be tight and you’re thinking more about the present than the future.
However, stashing away money in a tax-deferred retirement plan is one of the best ways to lower your taxes. Every small business owner should at least set up a plan, even if you’re just contributing a bare minimum at first.
Before starting any type of retirement plan, consult with your financial advisor and tax professional to determine how your business structure can benefit from different types of retirement.
Form to keep handy: Retirement Plans for Self-Employed People
10. Business Structure Affects TaxesIf you’ve ever filed taxes as a sole proprietor, then you understand that you’ve also got to pay self-employment taxes.
Forming a corporation or an LLC (and then making what’s called an “S Corp Election”) might help you reduce your self-employment taxes. That’s because, with an S Corporation, you can pay yourself a “reasonable salary”; any remaining profits can be taken as a profit distribution (and these aren’t subject to self-employment taxes).
Final ThoughtsIf you have any questions or concerns, it’s always best to consult with a tax professional. They’ll make sure you’ve crossed all your t’s and dotted your i’s. Here at Business Solutions by Design, we are just a phone call away and can guide you in the right direction for a stress-less tax time!
When it comes to taxes and the IRS, you never want to stretch the rules. Being overly aggressive with home based business deductions can easily raise red flags with the IRS. I like to tell my clients, if you’re comfortable explaining the deduction to the IRS agent knocking at your door, then use it. If not, ask a professional before embellishing that deduction! However, you should make sure you’re taking all the deductions that are legally allowed to you. After all, large corporations have legions of tax advisors helping them get the lowest tax bill possible.
There’s no reason you should have to pay more than you’re supposed to.
With that in mind, we outline tax time tips for all home-based, small business owners.
Keep in mind, these are general tips and aren’t meant to replace the individualized advice of your tax accountant or CPA.
1. Understand What’s Deductible for Your Home OfficeTo qualify your home office as a legitimate business expense, it’s got to be a place that is used exclusively for business activities.
If your kitchen table doubles as your work desk, you won’t be able to deduct it. But, if you’ve got a dedicated room for an office or even a portion of a room, you’ll be able to deduct some of your housing costs.
In the past, you had to calculate percentages for a deduction. But since 2014, home-based business owners use a simplified method. You can claim an amount per square foot of the office, up to a maximum square footage. Ask your tax professional for specific amounts.
You may have heard that the home office deduction is a big red flag and the IRS is more likely to audit self-employed professionals who take advantage of it. However, if you’re legitimately entitled to the deduction, take it. It can be one of your most significant annual expenses.
Form to keep handy: Form 8829: Expenses for Business Use of Your Home
2. Deduct Some of Your Home UtilitiesIf you’re taking a home office deduction, you’re also able to deduct a portion of your utility bills—namely your monthly heating and electricity bills.
In this case, you deduct a percentage of your square footage that serves as office space. You can also deduct some of your broadband/Internet bills, but you’ve got to take into account that you most likely use your home broadband for non-work purposes as well.
There are options for taking a standard deduction for home based business or an option to itemize deductions and that can be better explained by your tax professional too.
3. From Paper to Tablets, Expense Office SuppliesDon’t forget all the paper, ink toner, postage, paper clips and other supplies that you purchase. These are all fully deductible (provided you prove you’re using them for your business).
How about your new computer or iPad? These can also be deducted. However, keep in mind that if you only have one tablet or laptop, you’re also most likely to use it for personally as well. In this case, you can only expense the percentage of how much the equipment is used for business (i.e. 50% or 60%).
Form to keep handy: Publication 535 Business Expenses
4. Claim Home Office UpgradesIf you’ve been thinking about a new desk, office chair, bookcase, desk lamp or other office furniture, keep in mind that these are all allowable deductions.
Trying to expense a new painting might be a stretch unless you bring clients to your home office.
There are two ways to claim a deduction: all at once in the year when you made the purchase or gradually over the life of the property (known as depreciation deductions). These types of deductions should always be discussed in advance with your tax or financial advisor.
Form to keep handy: Pub 946: How to Depreciate Property
5. Save Money on Business Trips and TravelDid you attend a conference this year? Do you travel to meet a client (and aren’t reimbursed for those costs)? If so, you can deduct these expenses. Here’s what you need to know:
- You can deduct any transportation costs (plane tickets, bus fare, taxis, airport parking, rental car)
- You can deduct your lodging and tips
- You can deduct 50% of your meals for business days
Form to keep handy: Pub 463 Travel
6. Understand Mileage DeductionThis might be one of the hardest to decipher deductions in the tax system and one with the most questions.
If you’re working from home, you obviously can’t deduct any kind of daily commute—you also can’t deduct your morning trip to the local coffee house (no matter how necessary it might be!).
But if you travel to meet a client, perform a job outside the home, purchase business supplies, conduct research or do any other kind of activity for your job, you can deduct this travel. That includes a standard mileage deduction (or public transit fares), parking and tolls.
There are two (2) tools our clients use and ones we recommend for tracking mileage. The first is the Quick Books app for the self employed. It comes complete with automatic GPS tracking, organizing expenses and won’t drain your battery! The second is a paid app called MileIQ, and once MileIQ is installed it works in the background – there are no buttons to press to start or stop. Your miles are automatically logged and recorded creating a complete record of all your tax deductible and reimbursable mileage.
Keep in mind that commuting to your 1st appointment for the day is considered only that a commute and cannot be used for mileage deductions. But as a rule of thumb, when preparing your mileage for your tax professional, make sure to double check this with them.
Form to keep handy: Pub 463 Travel
7. Client Lunch Dates… You Can Expense ThatTaking a client out for lunch is a time-honored tradition, but it also causes its fair share of tax confusion. First, you can only deduct 50% of the meal, not the entire bill.
More importantly, the IRS is on the lookout for excessive or extravagant deductions. You’re going to run into trouble if you think you can fly a client to Barcelona for tapas or try to expense a $300 bottle of Cabernet with lunch.
Here’s what does work. Bringing a new client to lunch to finalize your contract. Let’s say the meal came to $74 including tips and taxes, so you are able to deduct $37 as a business expense. Remember to keep the receipt and on the back, jot down the date, the client’s name, as well as a few notes on the business matters discussed.
For potential changes to this rule for 2018, please wait for our April 23rd blog!
Form to keep handy: Pub 463 Entertainment
8. Know the Rules of Health InsuranceSelf-employed individuals (including sole proprietors) may be able to deduct the cost of health insurance for themselves and their family.
However, you can’t deduct your insurance for any time when you’re able to participate in an employer-subsidized plan (i.e. through your spouse or partner).
Form to keep handy: Publication 535 Business Expenses
9. Consider a Tax-Deferred Retirement PlanI know that for many small business owners and freelancers, especially those who are just starting out, the monthly cash flow can be tight and you’re thinking more about the present than the future.
However, stashing away money in a tax-deferred retirement plan is one of the best ways to lower your taxes. Every small business owner should at least set up a plan, even if you’re just contributing a bare minimum at first.
Before starting any type of retirement plan, consult with your financial advisor and tax professional to determine how your business structure can benefit from different types of retirement.
Form to keep handy: Retirement Plans for Self-Employed People
10. Business Structure Affects TaxesIf you’ve ever filed taxes as a sole proprietor, then you understand that you’ve also got to pay self-employment taxes.
Forming a corporation or an LLC (and then making what’s called an “S Corp Election”) might help you reduce your self-employment taxes. That’s because, with an S Corporation, you can pay yourself a “reasonable salary”; any remaining profits can be taken as a profit distribution (and these aren’t subject to self-employment taxes).
Final ThoughtsIf you have any questions or concerns, it’s always best to consult with a tax professional. They’ll make sure you’ve crossed all your t’s and dotted your i’s. Here at Business Solutions by Design, we are just a phone call away and can guide you in the right direction for a stress-less tax time!
When it comes to taxes and the IRS, you never want to stretch the rules. Being overly aggressive with home based business deductions can easily raise red flags with the IRS. I like to tell my clients, if you’re comfortable explaining the deduction to the IRS agent knocking at your door, then use it. If not, ask a professional before embellishing that deduction! However, you should make sure you’re taking all the deductions that are legally allowed to you. After all, large corporations have legions of tax advisors helping them get the lowest tax bill possible.
There’s no reason you should have to pay more than you’re supposed to.