By Jean Kruse / Guest Editorial
The old adage “it takes money to make money” goes by another name – the cost of doing business. Generating revenue requires spending money for materials, labor, advertising and so forth. What’s left is profit – the amount that small business owners always hope to maximize.
For the most part, the tax rules governing business expenses are pretty straightforward. An expense may be deductible if it is both “ordinary” (common and accepted in your field of business) and “necessary” (helpful and appropriate for your business). Here are a few examples:
Office supplies. This is an easy one. Pens, pencils, paper, envelopes, copier toner and printer ink all qualify under this category and are fully deductible.
Office equipment and furniture, and plant equipment. These items are deductible if they’re used exclusively for your business, but you have a choice in some cases. You can either deduct the entire amount in the tax year they’re purchased or deduct a portion of the expense over several years, which is called “depreciating the asset” or “depreciation expense.” You make the election on your tax return as to how you want to expense these purchases.
Expensing the entire cost of an asset purchase is known as a Section 179 deduction (for the defining portion of the IRS tax code). Congress has occasionally changed the Section 179 deduction rules as to the amount and type of property that qualifies; these rules are subject to change each year. Section 179 deductions can also include off-the-shelf software and some business vehicles. Several resources explain Section 179 deductions in full detail, including www.irs.gov, www.sba.gov and www.section179.org.
Vehicle expenses. Personal use of any vehicle can never be expensed, even by corporations, unless the value of the personal use is added to the employee’s W-2 as taxable income.
If you use your vehicle for personal trips – driving from your home to your business is considered a personal trip – be sure to keep detailed records of business-specific mileage, including the date, destination, purpose and miles traveled.
Most small business owners figure the deduction by multiplying the total business miles by the IRS mileage rate; this is called the “mileage method,” which is the easiest method. This IRS rate may change during the year and almost always changes on Jan. 1 of each year – this year’s rate is 57.5 cents per mile. Tolls and parking fees while driving for your business are 100 percent deductible when using the mileage method.
If your business uses four or more vehicles, you must use the “actual method” rather than the mileage method. Reducing your expense by the personal driving portion is still required. The actual method is also required if your business entity is a corporation and the corporation owns the vehicle.
Business travel. The deductions can add up when you hit the road for business, and include lodging, cabs, airfare, dry cleaning, etc. The key is the purpose of your trip. If it is entirely for business, then your expenses are 100 percent deductible. If the trip mixes in personal or vacation time, then you can only deduct a proportion of those expenses (e.g., one day of business meetings during a five-day trip would make them 20 percent deductible). The actual motel invoice is required; the credit card receipt is not acceptable as proof.
While you’re traveling for a business purpose, you may deduct 50 percent of your meal costs. Meals around home are not deductible unless you’re meeting with a client or potential client and you discuss business during the meal; that type of meal is also 50 percent deductible. You must keep a record of 100 percent of these meal costs, but when you get to the tax return, 50 percent will be disallowed.
Certain types of business meals are 100 percent deductible. If you bring in food to your office in order to keep your staff working through the lunch or dinner hour, or if you have an annual event such as an annual picnic or Christmas party for your staff, you can fully deduct the price of those meals. Make sure to keep them separate in your accounting records.
A “simple method” of taking a deduction for an office in your home was an option beginning in 2013. This new method has several advantages over the prior method – ask your tax preparer if this method might work better for you, or consider signing up for mentoring on the SCORE website and ask for more detail about this.
Many other “ordinary” and “necessary” business costs qualify as deductions. They include business-related classes, seminars and conference fees, employees’ pay, rent, interest, repairs to business equipment or facilities, retirement plans and more. IRS Publication 535, Business Expenses, available at www.irs.gov, has complete explanations of all types of deductions and when they may be applied.
You can get advice about taxes or any other small business-related issue by contacting SCORE. Our organization offers a wealth of information resources, training and free counseling designed to help entrepreneurs start, grow and succeed nationwide. For more information about these services or taking one of our webinars, visit www.score.org.
Jean Kruse is a SCORE counselor and SCORE Iowa district president. She operated her own CPA firm for 13 years and in 1988, joined RSM McGladrey, a national firm, where she provided accounting and tax services to small businesses.