By Mark J. Kohler, CPA, JD
As all small business owners know, this is a critical time of year to try and dig up all the expenses we can from last year in order to drive down our tax bill as low as possible.
As you are sitting around your kitchen table organizing receipts and combing over bank and credit card statements, don’t be timid or shy when considering your expenses. I truly believe that far too many business owners, CPAs and Tax Preparers are overly conservative and miss out on important expenses that we are entitled to.
Here are 5 tax deductions that should be maximized to the greatest extent possible and will have a major impact on your tax return:
1. Travel related expenses. In my opinion, this is one of the most underutilized tax deductions by small business owners today. Unlike meals and entertainment that are limited by 50%, travel expenses are 100% deductible. These include airfare, hotel, rental cars, valet, taxi, trains, tolls, etc… You would be shocked to know how many tax returns come across my desk every year of new clients with literally zero travel deductions. Consider all of your travels last year that may have involved a meeting with a client, a vendor, or a training meeting, a tour of a competitor’s facility or store, your annual board of directors, shareholder, manager or member meeting, a conference with retreat with a partner, the list goes on and on. It just doesn’t make sense for any business owner to not have some travel expenses.
2. Auto Deductions. Remember this isn’t travel, but expenses for your car or truck used in your business. There are two main options: mileage or actual expenses, and statistics show that 90% of small business owners actually utilize the mileage method. For 2012 this was 55.5cents per mile. Surprisingly, again I see many taxpayers shy away from claiming their true mileage because they are afraid of an audit. True, you should do your best to keep a written record, but if you haven’t been extremely detailed, still utilize an estimate and take the deduction. I would rather see my client defend the deduction than not take it at all. As for ‘actual’ expenses, this is for those typically with large trucks or SUVs. Again, do your best to track down your fuel, repairs and maintenance for last year if you used the ‘actual’ method.
3. Dining and Entertainment. Again, a highly underutilized expense by small business owners and should be a healthy line item on your tax return. Please make sure you consider all of your meals last year where you discussed business with a partner, or a potential client, vendor or strategic alliance. If you didn’t keep a receipt, still take the expense. Technically, you don’t need a receipt if it was less than $75, but you still should be able to substantiate it if necessary with a credit card or bank statement and the purpose of the meeting. Another overlooked fact is that you can write-off dining by yourself when you are traveling. This has been defined as outside of a normal commute of your home office or place of business and business owners should be diligent in tracking these expenses. However remember, although you are traveling, all dining and entertainment is still limited to 50% of the full amount.
4. Office Supplies and Technology. Every small business owner is regularly buying supplies and upgrading their phone, computers and digital reading devices. Don’t forget that when you have a small business, the majority of these items can be fully expensed. Make sure you track them and discuss with your tax advisor which expenses for items should be reduced by some percentage for personal use if necessary.
5. Technology and Telephone. This is obviously an ever increasing expense as small business owners utilize technology to do business nationwide, if not worldwide. Many also don’t know that recent case law and IRS rulings allow business owners to write-off 100% of their cell phone expenses, so long as they have at least one dedicated home phone line. Moreover, make sure to include the cell phones of your family members that work in the business alongside you and need a cell phone for their legitimate roll in the business.
Now with all of these expenses, you need to take into account your overall income, profit and the size of your operations. Your deductions need to look realistic and common for the type of business you have. However, if they’re legitimate and you have support, don’t be afraid to take them. Go for it and just have your records as back up if you need them in the future to justify your expenses.
Mark J. Kohler is a CPA, Attorney, advising small business owners around the country on tax and legal issues to better live the American Dream. For more information about Mark, his Radio Show, Best Selling Books, Videos and Webinars, please visit www.markjkohler.com. He lives in Southern California with his wife and 4 children trying to find time to surf during tax season.