subject: Getting Ready For Year End: What's Tax Deductible? [print this page] In this article, I would like to discuss what's deductible for business; and why we need to track large purchases for our business separately.
-What's deductible?
Gathering information for your tax return is much simpler once you know what you are able to deduct for your business. Here's a quick list to review (may not be all inclusive):
1. ALL cash paid for ANYTHING in your business. See the following items for things sometimes forgotten.
2. Do you have a home office? If you use part of your home exclusively for business (even if it's not a separate room) then you can take the home office deduction!
3. Automobile expenses. These can be taken in one of two ways:
-Mileage-keep a mileage log during the years tracking mileage for BUSINESS use of your automobile. Note that travel between home and your office is considered commutingnot business mileage. However, if your office is at home, every time you leave your house for business you should log that mileage.
-Actual automobile expenses-Instead of mileage, you could track ALL the money spent on your automobile this year. Fuel, repairs, maintenance, etc. Then, you'll figure a percentage of time you use your vehicle for business, and take that percentage of the expenses on your tax return.
4. Cell phone- if it's used for personal and business use, take the percentage of time used for business to get the business deduction allowed. I look at my phone bill on a monthly business and determine what % of calls were business related.
5. Internet-if you are using your home internet service at all for business, then it's deductible! (Figure out the % of time you use it for business vs personal)
6. Travel/education/conference expenses- If you go to a business conference or trade show, all of the travel expenses, meals, fuel, parking fees, etc. are deductible. If you buy an ONLINE course, that's deductible too:)
7. Any major purchases you made for your business. Things like cell phones, computer equipment, office furniture, office equipment, tools, vehicles, repairs on your office, etc.
8. Business purchases made with personal funds. Remember that you need the receipts/bank statements to document these as business expenses.
-Major Purchases
You may have heard the term "fixed assets" before. These are generally larger costs to your business. Equipment, furniture, computers, automobiles, renovations to your space, etc.
The IRS says that we must take the cost of these fixed assets over a period of years. In other words, if my business purchases a computer this year, I can't take the cost of that computer as a deduction on my tax return during this year. I must "depreciate" it over a period of, say, 5 years. 20% of the total cost will show up each year until we've used all the cost up.
-Depreciation-taking the value of something over time, shows up as an expense on the tax return
To make things more confusing, the IRS has a rule called the Section 179 deduction. This is a rule that says that a business may take up to a certain amount of fixed asset purchases as expenses in the year of purchase. The limits may change year to year. And, on top of that, there's sometimes "bonus depreciation" allowed.
You can see how this area of the tax law can become confusing. It's best to have a CPA or tax attorney help you out with this for your business so you get all the deductions you're allowed.
In order for your tax preparer to get the deductions right for your major purchases, keep a separate list (QuickBooks allows you to do this) of fixed asset purchases and all the details. You'll need the following information for all fixed assets for this year:
-For fixed assets sold- Date of sale and $ amount sold for
-For fixed assets thrown out or given away- Date thrown out or date donated (donation could be deductible)
-Action Steps:
1. Review the items that are deductible for your business. Make sure you are gathering the necessary information for the home office expense, vehicle mileage, travel and conference expenses, cell phone charges, etc.
2. Look at all the equipment that's used for your business. Make a list (even if on Excel) for your tax preparer. Don't forget to include things that you donated to your business from your personal use. (like furniture or computer equipment) Your tax preparer can help you come up with a value of items that were used in your personal life, and now are things you use in your business.
3. Do you understand how depreciation works? You don't need to know all the details, but it's best to have a CPA do your return. Have your CPA explain this to you so you understand whether you are getting the full deduction this year for your assets, or whether they are being depreciated over time.
