5 Ways to Never Miss a Tax Deduction Again
Create a safety net that will save you money.
Small-business owners wear many hats. They tend to fill every role — from the chief executive to the janitor. Business owners also need to keep in mind their business taxes and the complexities involved in documenting the money moving into and out of the business. They have to know what to track and what is tax deductible.
Unlike personal tax deductions, which are limited and listed by the IRS, knowing what a business can deduct as an expense isn’t as clear-cut. An obvious tax deduction for some, such as the use of a personal vehicle to run business errands, may be something others hadn’t considered.
There are many lists online that offer examples of what business owners can deduct. Some deductions are quite creative such as renting your home to your business for the annual shareholder meeting while others are more obvious like the deduction for a home office. It’s unlikely that business owners will remember these long lists, however, so here are five key tips to make sure you never miss a tax deduction again.
1. Use a business checking account
The first thing any business owner should do is separate all business and personal funds. This is not just good business practice, it’s also highly recommended — and usually required — in order to keep your business entity separate from yourself. When all your business transactions are in one place, you know they will be accurately tracked and deducted.
2. Separate credit cards
If you are new to business, getting a business credit card can be challenging. Sometimes you can’t rely solely on cash and have to tap into personal credit cards. In this case, from a tracking and tax deduction standpoint, it’s best to designate a personal credit card for strictly business use. This way you know that all charges on that card are business expenses, and you can simply pay the card from the business checking account.
3. If in doubt, track it
If you’re unsure if a transaction has tax implications, it’s best to track it and ask your accountant. You can always determine the tax implication at a later time. If you don’t track the transactions, there will be no data to help you determine how to handle the transactions at tax time.
4. Perform a litmus test
One simple way to think about business expenses and their tax deductibility is to ask yourself, "If I didn’t have this business, would I have incurred these expenses?" If the answer is no, then it’s likely that the expenses are deductible. If the answer is yes, they may still be deductible, but more scrutiny is required to determine this.
5. Learn what’s not deductible
While the list of tax-deductible business expenses is seemingly infinite, the list of expenses that the IRS does not allow is much shorter. It can be much easier to know what isn’t deductible, like personal grooming and clothing, than what is.
The best advice is to track everything. You don’t need to remember all the tax rules: That’s what a tax preparer or accountant is for. Most businesses lose out on a lot of tax deductions not because they aren’t aware of them, but simply because they don’t track everything. Remember that while it can be tedious, it will be worth it at tax time when the savings roll in.
Related: 15 Small-Business Tax Deductions
Entrepreneur Leadership Network Contributor