Keep Good Records and Follow Deductible Rules
It’s that time of year again. Time to pull out the receipts and calculator and sit down to calculate your expected tax bill.
Even though you may have been gathering your business’ tax information for years and think you’re an old pro, there are several mistakes small business owners make that can add up to a significant amount of money in the end.
The IRS reports the reason most small businesses lose deductions in an audit or fail to comply with tax reporting obligations is not dishonesty, rather the lack of good record keeping. When it comes time to file taxes, small business owners can really miss out if they didn’t save receipts of their expenses.
Even the small amounts of cash spent on office supplies or sodas for the employee lunchroom are deductible. It may seem like a pain to keep track of the little things, but just $50 per month results in $600 at the end of the year, all of which can be deducted.
Simplify your cash expense record keeping by reimbursing yourself by check. Tally the amount of a week or two’s worth of receipts and write yourself a business check for the amount you spent.
Another option is to charge all of your business purchases on a corporate charge card. You can use the regular management reports provided to keep track of what you have spent.
– Differences Between Two Types Of Expenses
It is important for small business owners to understand the difference between current deductible expenses and capital expenditures and how they affect taxable income for the small business.
Current expenses include monthly bills for overhead such as rent, power and water and office supplies. Current expenses can be deducted for the year in which you incurred them.
Capital expenses, or the cost of items that will help you generate revenue now and in the future, must be deducted over the life of the item. For example, the cost of a new fax machine or a company car must be depreciated. You can generally write off these types of capital expenditures over five to seven years.
Small-business owners are eligible for a special tax break known as the expensing deduction. According to Section 179 of the Tax Code, you can deduct up to $19,000 in 1999 capital expenditures for items such as furniture and equipment, immediately rather than depreciating the cost over several years.
This deduction also applies to purchases made in 1999 that were not billed until 2000. As long as the item purchased was put into use by the end of the year, it is eligible for full write-off.
There are specific rules that must be followed when expensing. To qualify, equipment such as cellular phones and personal computers must be used more than 50 percent of the time for business purposes.
– Defining What Can Be Deducted
The lines defining what is and is not deductible are unclear to many small business owners. Often the confusion results in key deductions being misunderstood or completely overlooked.
The IRS has recognized that more small businesses are run out of home-based offices. As of Jan. 1, 1999, home office deduction rules have become more lenient. The definition of a “principal place of business” was expanded by the Taxpayers Relief Bill of 1997, making the home office deduction more accessible to small business owners.
The self-employed who manage their business from their homes, but also provide a service or meet clients at another location, benefit from the revised definition.
Another benefit for the self-employed is that, for 1999, they are eligible to deduct up to 60 percent of the cost of their health insurance. The eligible amount is the cost to cover the business person, their spouse and dependents and is available whether or not you itemize.
If you attempted to launch a new business in 1999, you are eligible to deduct, over a period of time, the actual costs you incurred to start your business. The costs of investigating the potential for a new business and getting that business started are considered capital expenditures by the IRS.
These costs can generally be recovered by amortization. The existing tax law allows you to choose to amortize the costs associated with starting a business over a period of 60 months beginning the month you opened for business.
– Business Start-Up Costs Are Deductible
In order to do this, the IRS requires two conditions to be met. First, business start-up costs are deductible, through amortization deductions, only if they were paid or incurred to start or form an existing business. Second, the costs were paid or incurred before you began business operations.
If you researched the possibility then decided not to go into business, any costs you paid to investigate the options of going into business are classified as personal costs and are not deductible. Costs you paid in your attempt to actually start or purchase a specific business that ended up not being purchased by you can be claimed as a capital loss.
Deductions for personal cars used for business and company-owned cars shouldn’t be neglected. Some of the costs associated with keeping the vehicle running are deductible.
There are two ways to go about claiming these expenses. First, you have the option of deducting the actual expenses of maintaining the car, including gas, oil, tires, insurance and repairs.
The second option is to deduct a standard amount based on mileage. The IRS adjusts the standard mileage rate each year. The 1999 standard mileage rate was lowered, effective April 1, to 31 cents for each business mile driven.
Choose your options carefully. Once actual expenses have been deducted for a vehicle in its first year of use, you cannot switch to the standard mileage rate method in a subsequent year for that same vehicle. And, don’t forget those other business travel expenses, such as plane tickets, hotels, meals, taxis and telephone calls, which can be deducted as well.
– Entertainment Should Be Related To Business
Entertainment expenses can qualify for a deduction if they are “directly related” to the active conduct of your business, which means business is the primary purpose of the meal or entertainment expense.
Expenses “associated with” business, meaning even if you don’t discuss business at the meal, the meal or entertainment expense precedes or follows a business discussion, are also deductible.
If you meet a client for lunch to review a new proposal, the expense of the meal is directly related to the active conduct of business. If you followed the lunch date with a Padres game, the activity is associated with the conduct of business and is also deductible.
As a small-business owner, you can deduct 50 percent of your qualifying business meal and entertainment expenses spent on clients or customers.
That Christmas party you threw for your employees is also deductible. In fact, holiday parties, company picnics and other social events you host for your employees and their families are 100 percent deductible.
In addition, any gifts to clients or employees that are given in the course of business are deductible up to $25 for any one gift given to each person during that year. Any costs associated with gifts that exceed the $25 amount are disallowed.
If you get stuck with an invoice that a customer or vendor didn’t pay, that bad debt may be deductible.