Every spring, small business owners search for every tax deduction they can possibly claim. It’s understandable that you would try to reduce your tax bill by every dollar possible, but making mistakes with your deductions could cause you a big headache if you’re audited later. The following five examples are possibly the most misunderstood – and misused – small business tax deductions. Make sure you’re claiming these deductions correctly, or you could end up owing the IRS more money someday.
Business meals. In order to claim a business meal as a deduction, you must be eating the meal with the primary purpose of conducting business. This usually means meeting a client over dinner to discuss a deal. However, if the dinner is unusually lavish, the IRS might question it. Another thing to remember is that your daily lunch cannot be deducted, even if you’re eating it at your desk while working.
Home office. If you run your business out of your home, you probably claim a home office deduction on your taxes. Unfortunately, the IRS will disallow this deduction if the office space is used for anything but business purposes. This means the office cannot double as a guest room, study, or playroom for the kids. Your home office expenses also cannot be used as a business loss.
Business expenses. This is one of the most murky territories in small business tax deductions. In order to be counted as a business expense, the items in question must be used 100 percent exclusively for the business. So, for example, that new suit you bought to impress clients cannot be counted as a business expense, because you may also wear it to a funeral or wedding at some point. Employee uniforms, on the other hand, would most likely qualify.
Equipment. If you purchased equipment for your small business, you may be able to write it off as an expense. However, the rules regarding these small business tax deductions are pretty strict. These items cannot create or increase a loss, so for younger business with a low profit margin these items may not be allowed as a deduction. Check with your tax advisor before making large equipment purchases. If you can hold off another year or two til profits increase, you might get a better break on your taxes.
Automobile use. Automobile use is one of the more popular small business tax deductions. But don’t make the mistake of thinking that you can purchase a vehicle and write off the entire expense. What you’re actually claiming is the depreciation of the vehicle, not the upfront cost. For a 30,000-dollar vehicle, it could take about 12 years to completely write off via your taxes. It’s also important to remember that using the vehicle on your personal time will reduce the amount of tax deduction you can claim.
If you have specific questions pertaining to your tax situation, we always advise that you consult with a tax professional.