As 2020 comes to a close, it is important to have some knowledge of what you can and cannot deduct. Three main deduction categories often have grey lines that could use some clarification. Those categories are Home Office, Technology Purchases, and Travel. While you always want to deduct as much as you can, you want to make sure you aren’t stepping over the line with the IRS. Here is what you need to be aware of with these deductions.
Home Office – Though many small business owners are nervous about taking this deduction in fear of causing an audit, this shouldn’t deter you from claiming deductions that are legitimate. The rule of thumb is that you just need to make sure your deductions are in fact business expenses.
- Ensure that your home office is a distinct area for business use only. This can mean that your office is a separate room or it can mean that you have a partition in place to make your workspace clearly separated from your living space.
- To figure out what portion of your rent, mortgage, utilities, taxes, and maintenance you can take, simply measure the square footage of your workspace and divide it by the total square footage of your home and get the percentage. You can then apply that percentage to your bills to get the total deduction that would be available to you.
Equipment Purchases – Technology will always be a cost for any small business. Whether it is new equipment like computers, laptops, printers, or phones, the IRS will allow most purchases to be deducted in full. Software is also fully deductible. The IRS will allow you to deduct the cost of software that is required for you to perform necessary business tasks. Subscriptions and newsletters for business purposes are also fully tax-deductible.
The IRS will also allow you to deduct the cost of company vehicles. Depending on the full cost in the year of purchase, you can deduct the full cost or split it up between several years. If you only have one car, do not try to deduct the cost of the vehicle because you can’t justify that vehicle is just for business. You are also allowed to take the mileage deduction or itemize your vehicle expenses like repairs to help offset the cost of your day to day commute for your business. Just make sure you are keeping track of your mileage in full detail.
Travel Expenses – Travel for most small business owners is vital for businesses’ success and growth. You can write off expenses like airfare, hotel fees, car rental and mileage, and even laundry costs. Your food on your business trip is deductible up to 50%. Here are a few things to think about when calculating travel expenses.
- If you’re taking clients out for a meal, you can deduct 50% of that meal. You just need to keep your receipt and a record for what that business meal was for.
- Conference costs and tickets are tax-deductible if it is directly related to your business. Before deducting a conference cost make sure that it was not for personal uses.
- Entertainment expenses on your business trips like sporting events, golf, or tourist attractions are NOT deductible. Make sure to keep business and personal pleasures separate.
- If you take your family on a business trip, you are allowed to deduct your business expenses only.
In the end, like anything with taxes, record keeping is vital. You are allowed to take up to 250 deductions if they are applicable to you. The rule of thumb when it comes to business deductions is “was this expense ordinary or necessary for the business to operate”. Make sure you are keeping detailed records of your business costs and if you have any questions about whether you can or cannot deduct something, schedule an appointment to speak with one of our experts. Happy Filing!