It’s that time again. The inevitability of death… and taxes.
Write-offs can be a headache when it comes to preparing income tax returns for your business. They are often what causes a business to be red-flagged by the IRS because there are so many regulations and many small business owners just aren’t sure how to do it right.
While a certified public accountant is the best way to have your taxes prepared, you still need to organize your expenses. If you choose to do them yourself, then this is all the more important. Here are some pointers on how to correctly handle a couple of the most common tax write-offs.
With any travel expenses that you plan to write-off, you will need to be able to prove that the travel was directly related to your business, such as a product convention or meeting with a client. Flight costs typically aren’t a problem, even if you always fly first class; it’s the limo you rented to ride from the airport to the hotel that would be cause for concern. Hotel rooms are only deductible at a rate of 50 percent. If you take a spouse with you, then you can only deduct 50 percent of the amount you would pay if you were traveling alone.
This is where a journal or electronic log really comes in handy. When traveling on business, be sure to document your daily events, like which clients you spoke to, where and when you met and what you discussed. Should your business ever be audited, the IRS will require you to produce such a journal.
Family vacations are not a tax deduction, unless your family members are part of your business. You have to justify that by holding business meetings or by all parties attending a business convention while on the trip. If you go to the Bahamas and lay on the beach all five days, chances are you really shouldn’t try to write that off.
Whether you’re traveling or dining with a client at Ocean Zen here in Springfield, you can write meals off but only at a rate of 50 percent. You’ll also need to be able to verify that you discussed business in some regard, so be sure that your “client” is aware of that when you sit down for won-tons. It might just be a good idea to indicate on your electronic log what was discussed, so you don’t have to try and remember later.
Another option when it comes to meals when traveling for business, is to write-off the designated daily amount, which is $46 per day for 2010 tax returns. This is only possible for travel within the continental U.S.
If a vehicle is used exclusively for your business, then generally you can deduct all of the expenses for operation of the car. However, the standards of “exclusive use” are hard to meet. It’s more likely that your vehicle is used for both personal and business and you will, therefore, have to determine what operation expenses are considered deductible.
Generally, travel between two business destinations is considered a deductible operation of the vehicle. This can mean travel from your home office to the post office on Chestnut Expressway to deliver mail, to Springfield Office Supply to pick up an order, or to a client’s location (and back again).
Travel to work locations that differ from your regular place of business also count. However, travel from your home to your office on a daily basis is not deductible, even if you have your business advertised on the side of your car.
Generally, travel deductions using a vehicle are calculated by mileage. Again, in your journal, indicate the odometer reading upon departure from the office and upon arrival at your new business destination. Also, indicate how this travel relates to your business.
If you work from home, you can only write-off the percentage of your bills related to the area dedicated solely to your business. For accuracy, which is something the IRS appreciates, hire a local contractor, like HA Construction Design, to measure your home office space professionally (better yet, build you an office addition) and provide the square footage that your home office occupies.
Once you have the measurements, figure out what percentage of your home is dedicated to your business. You can then write-off that percentage of your mortgage/rent, bills to City Utilities of Springfield, etc. Keep in mind, however, that this area of your home must be used exclusively for your business. If it is, in any way, used for personal matters (i.e., your home computer is used for both business and personal), then you cannot right off percentages of your household bills.
If your home computer is used for both personal and business matters, then the expense of the computer is not deductible. Instead, you will need to keep a log of the time you use it for business purposes, much like with your home office. Then, determine a percentage of your time in which you use the computer for business and that is how much of the computer is deductible.
Another option would be to invest in a laptop that you use for business purposes only. This will allow for the entire expense of the laptop to be deductible.
Phone and Internet Bills
If you have a home office and your mobile or landline is used predominately for business calls, you can write off the entire bill. However, if you use the phone for both fairly equally, then you will have to be sure and get an itemized bill from the phone company and indicate which calls, both incoming and outgoing, were business related. It’s a good idea to also indicate the client for each call. The same thing goes for Internet service.
The easiest way to avoid extra time and effort is to simply purchase a separate cell phone or get a separate phone line in your home for business calls only. If you opt for the separate cell phone, you can also write-off the phone itself.
These are just a handful of the vast expenses that you might be able to write-off each year. It’s a good idea to consult with a professional accountant if you are not familiar with all the regulations. It’s better to spend a little extra money getting some help the first few times than to make a mistake and face an audit.
Portions of this article originally published by GreatFX Business Cards, offering free online business card design and eco-friendly color printing.
IRS: Business Expenses