When small business owners make tax deduction mistakes, it can be costly. The costs go beyond the likelihood of an audit by the IRS and actually impact the bottom line. Think about this: you could be overpaying your tax responsibility. That would be an expensive bummer because the IRS will more than likely consider it a “gift”. On the other hand, you could miscalculate or over-deduct and face the additional cost of penalties due to the IRS. Nobody wants that. Finally, you could be leaving money on the table by not taking advantage of all the tax savings opportunities you can.
Don’t worry. We’re here to help. Pay attention to the following 10 deduction mistakes, in no particular order, small businesses often make. Knowing is half the battle. (The other half is seeking the advice of a professional. More on that later.)
Mistake #1: Mixing Business and Personal Expenses
One of the challenges of being a small business owner is keeping your accounts separate. The same holds true when it comes to deductions. People tend to do one of two things:
- Try to deduct personal expenses as business expenses, or
- Fail to deduct business expenses because they blur with personal expenses
Take your automobile, for example. If you use it strictly for business purposes, then you can write off all your expenses (fuel, maintenance, tires, etc.) as business expenses. However, if you use it for both personal and business purposes, tracking mileage probably works best. That means keeping a log of the mileage you travel specifically for business purposes (to meetings, to trainings, to business lunches, etc.)
Because tracking the mileage can be time-consuming and tedious, or because you just plain forget to do it, you’re leaving money on the table. We recommend using specific apps for your smartphone that makes the required tracking of mileage quite easily.
It is incredibly important to invest in accurate and informed accounting systems that properly reflect your financial activity and that not only provides you an accurate net income or loss amount, but keeps track of all your income and expenses correctly as it pertains to your taxes.
Mistake #2: Deducting Ineligible Expenses
There was a time when business owners could deduct up to 50% of the costs related to entertaining prospects or customers. That time has passed. In other words, the golf outings and courtside tickets aren’t deductible. (Note: lunches are still acceptable business expenses, provided the lunch is business related.)
Mistake #3: Failing to Deduct Startup Costs
If you started your business this tax year, keep your receipts for all the costs associated with the startup, or hire us to do your accounting and maintain your IRS audit defense file. Many may be deductible. These could include fees, legal assistance, consultants, and other costs. Talk to a CPA to know exactly what can be deducted. Track the costs and keep your receipts.
Mistake #4: Failing to Keep/Submit Receipts for Business Expenses
Speaking of keeping your receipts. . . That’s another big mistake small businesses tend to make. Not only should you keep all of your receipts and track all of your expenses, but you should also submit those receipts to the accountant who does your taxes. It might help to make a note on the actual receipt about what it was for exactly.
We digitize all of our client-submitted receipts when provided and requested so that they will exist with your accounting and tax records while linking them to the applicable amounts in your financial statements and your tax return(s).
Mistake #5: Failing to Determine if the Business Qualifies for a Qualified Business Income Deduction
Otherwise known as the pass-through deduction, this legislation exists to prevent business owners from bearing twice the tax burden: once with the business and once for personal income taxes. Qualifying means you can reduce some of that burden. An accountant will help you know for sure if you qualify (and how much it could potentially save you).
This new deduction has proven to be a huge benefit to our clients this year!
Mistake #6: Failing to Deduct the Cost of Health Insurance
Good news! People who are self-employed can write off a portion of their insurance premiums. You’re paying the premiums anyway. You might as well get the tax benefit.
Mistake #7 — Ignoring Section 179 Deductions
(Or the Newly-Allowed Bonus Depreciation Rules)
Section 179 Deductions allow businesses to deduct the expenses related to the purchase of items like vehicles, equipment, machinery, and computers used by the business. Additionally, nearly all fixed assets with a useful life of 15 years or less can be deducted fully if properly treated in your financial records and tax return(s).
Mistake #8 — Failing to Deduct the Cost of an Office Rental
If you pay to rent office space, those payments may be deducted. If you own the building or work from home, different deduction options apply. Check with a professional accountant for details.
In most cases, we prefer to work with our clients to create an eligible “qualified expense reimbursement policy” that will allow their businesses to reimburse them tax free for their home office expenses, and in many cases, preclude the requirement to file the well known “red flag” home office deduction form on their personal tax returns. This can only be done by following the needed requirements and accounting for the related expenses correctly.
Mistake #9 — Failing to Deduct Advertising/Marketing Expenses
You have to get your name out there. Advertising and marketing cost money. Fortunately for small business owners, those expenses are potential write-offs. Again, keep your receipts and give them to your accountant.
Mistake #10 — Not Deducting Fees
Small businesses may deduct the expenses associated with accounting, bookkeeping, tax services, legal fees and more. If you don’t know whether the fee is deductible, just ask.
Don’t try to remember all the details on your own. You have a business to run. Let the accountants at Pine and Company make sure you maximize the deduction opportunities while minimizing the mistakes.