Business owners have a definite advantage over employees when it comes to taxes. Employees work for wages. The employee has to pay the government first through federal and state income tax withholding, Social Security and Medicare taxes. After that whack, there are not very many deductions left for the employee. Even if they incur unreimbursed out-of-pocket expenses, employees are limited on deducting such items on their personal income tax returns. On the other hand, the business owner has many deductions available and a lot of flexibility when it comes to tax planning. But for now, let’s review some of the key expenses that business owners can deduct, and thus, lower their taxes.
Startup Expenses—You are permitted to write off a certain dollar amount of startup expenses in the year business begins, and the rest can be deducted over a period of 180 months. Startup expenses include expenses incurred to investigate the business, to actually create the business, or to engage in a forprofit activity in anticipation of that activity becoming an active business. To be eligible, an expense must be one that would be deductible if it were incurred after the business actually began.
The Home-Office Deduction—In order to qualify for homeoffice deductions, any one of the following must be met:
• Your home office is your principal place of business, exclusively and on a regular basis.
• Your home office is used for meeting patients, clients or customers.
• Your home office is located in a separate unattached structure on the same property as your home. (For example, an unattached garage, artist’s studio, workshop or office building.) You may also deduct the cost of space in your home used for inventory or product samples.
Automobiles and Other Vehicles—The cost of operating and maintaining a vehicle is deductible against business income to the extent the vehicle is used for business. You may use actual costs of operation to determine the amount of the deduction, which would include depreciation or lease expense, maintenance and repairs, tires, gasoline, oil, insurance and registration fees. Or you may deduct an IRS-prescribed rate per mile, but you cannot use both methods. However, parking fees and tolls attributable to the use of a vehicle for business purposes may be deducted as separate items. The business use of an automobile is determined by the mileage driven for business purposes, compared to the total miles driven during the year.
Record-keeping requirements to substantiate automobile deductions are fairly stringent. Taxpayers claiming deductions with respect to automobiles and other vehicles are required to furnish the following information for each vehicle:
• Total mileage driven
• Business mileage driven
• Commuting mileage driven
• Other personal mileage driven
• Percentage of business use
• Date vehicle placed in service
Employee Fringe Benefits—Group life and disability insurance, qualified employee retirement plans and similar fringe benefits may be deducted as business expenses by a C corporation. The corporation’s owners and employees receiving these benefits are not taxed on their individual returns for the value of such benefits. On the other hand, in flow-through entities, such as S corporations and LLCs, the owners must pay taxes on the value of the benefits received.
Be sure to work with competent advisors to make sure you are not missing eligible deductions and are saving on taxes through your business entity.