Commonly Overlooked Tax Deductions
Q: I need to save as much money on my taxes as legally possible. Are there any business deductions that can get overlooked?
A: As a business owner, it's easy to overlook legitimate business deductions for taxes. After all, so much of your life likely has some element of tax-deductibility.
Keep in mind that many things not normally tax-deductible for individuals become deductible to you as a business owner. Here are a few examples:
- Your car: If you use a car in your business, you can deduct the business cost of the car, plus operating and maintenance expenses that pertain to business activities. You can take this deduction based on either actual costs or the IRS' "standard mileage rate," whichever gives you the greater deduction. This deduction is available to you whether you or your business owns or leases the car.
- Personal assets: Depending on the percentage of use that pertains to your business, some of your personal assets may become business tax deductions. This can be accomplished in part or in total, depending on the situation. For example, if your home computer is used 60 percent for your business, 60 percent of its cost and operating expenses can become business tax deductions.
- Your home: The home office is the portion of your home that's used for business purposes. As a business owner, you may qualify to take a home office tax deduction. In order to qualify for this deduction, your home office must be used for your business on both an exclusive and regular basis. If you qualify, you may deduct depreciation and other indirect expenses of operating your home on a pro-rata basis.
- Your family: Sometimes you can convert family activities into tax-deductible expenditures for your business. For instance, if you don't qualify as an employee of your business, you may be able to create deductible family medical coverage for your spouse, your children and yourself by hiring your spouse in your business. Also, you can hire your children to do legitimate work for your business-depending on the type of work, your kids can begin earning wages from around age 8 up until they have a "real" job and are on their own. This actually allows you to shift income away from your business to your children, who are typically in a lower tax bracket or who may not have any tax liability on the dollars they're paid. Another option: Rather than supporting your parents using after-tax dollars, hire your parents to perform legitimate work for your business.
- Travel: Travel expenses, such as airline tickets, taxi fares, baggage, shipping, your car or a rental car, overnight lodging, 50 percent of the cost of meals and other selected expenses are tax-deductible when you travel on business. When you combine personal travel with business, the expenses must be pro-rated between the two, with the exception that the full cost of the round-trip airfare is tax-deductible as a business expense. Also, you can deduct the travel expenses of an employee, partner or customer who travels with you on business. Even a substantial portion of the cost of taking a "business" cruise may be tax-deductible.
- Entertainment: You can deduct 50 percent of your business-entertainment expenses. These expenses include business meals, as well as the cost of attending entertainment where you discuss relevant business topics with a customer or client. This may also include the cost of tickets for you and your customers to attend sporting events, concerts and other forms of entertainment (excluding country club dues).
- Retirement: For you to qualify as a participant in a tax-deductible retirement plan funded by your business, you must have earned income each tax year in which you wish to participate. Earned income consists of your share of the business' profits plus wages paid to you by your business. Dollars used to fund your retirement plan are tax-deductible to your business and grow tax-free until you retire.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
David Meier received an MBA in Finance from Loyola of Baltimore, and spent much of the 1970s teaching business courses; later, he created a consulting group, and for the next two decades, provided accounting and tax services to small-business owners. He is currently the founder and COO of Business Development Coaching, which provides small-business owners with ongoing business coaching and the knowledge and support required to enable them to become truly successful entrepreneurs. Visit his site at www.makeyourlifetaxdeductible.com.