business expenses

Deductible Business Expenses

The best way to find out what business expenses can be deducted from your income is to consult with your Simma Flottemesch & Orenstein representative. Reducing your business’s income by expenses means you have less money to pay taxes on. However, the scope of potentially deductible expenses is a wide range. Do yourself a favor and keep as detailed records as possible, especially when it includes the following:business expenses

General Business Expenses

Unfortunately, there is no master list of what the IRS allows your business to deduct. Instead, your CPA can help you determine whether certain expenses are incurred as a “cost of carrying on a trade or business.” At a minimum, these may include:

  • Office supplies
  • Utilities
  • Furniture and equipment
  • Software
  • Advertising
  • Rent or mortgage payments
  • Wages, salaries, bonuses, commissions and employee health insurance premiums

The IRS also requests, in the classification of these expenses, that they be “ordinary and necessary.” It defines such as “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.”

Other Business Expensesauto expense

You are allowed to deduct up to 50 percent of the costs of meals and entertainment when those outings are associated with business operations. Therefore, the event must take place immediately before, after or during a business discussion.

If you are staying on top of your business knowledge through the use of trade magazines, business seminars or other learning materials, these books, magazines and educational programs can be deducted from your taxes. Make sure the subject matter of these materials contribute to your ability to run, maintain or improve your business or trade.

When you start your business, any startup costs are considered capital expenses rather than business expenses, since business expenses cannot be incurred until your business is up and running. In the first year of business, up to $5,000 of your capital expenses can be deducted. What remains beyond that $5,000 can be deducted from your taxes for up to a 15-year period.

Special Expense Deductionshome office

Home office and auto expense deductions are calculated in two different ways. These methods include the standard method or the actual method. For auto expenses, the standard method is a deduction of 53.5 cents per business mile, plus toll and parking fees. The home office standard method allows a deduction of $5 per square foot, with a maximum of 300 square feet, or $1,500. Using the actual method for auto expenses requires you add up all auto expenses (gas, repairs, oil changes, etc.), and multiply the total by the percentage of miles that were used for business purposes. The actual method of calculating your home office deduction requires you add up all home expenses and multiply it by your home office percentage (office square footage divided by your home’s total square footage). For the home office, any expenses related to the space are included if the space is used exclusively and regularly for business.

Working with a CPA from Simma Flottemesch & Orenstein will maximize your business expense deductions by making sure all expenses relevant to your business are accounted for. Doing your taxes yourself often leads to these deductions slipping through the cracks or being inaccurately recorded. Get peace of mind when you prepare your taxes with a professional from our offices.

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supplies

Deductible Business Expenses for Small Businesses

The IRS requires that deductible business expenses must be both ordinary and necessary for business operations. If an expense is common to your trade or business, it is an ordinary expense. A necessary expense is helpful and appropriate to the operations of your business or trade. Deducting these qualifying expenses lowers your income tax bill. Even common business expense deductions may not apply to your specific small business. Working with a CPA from Simma Flottemesch & Orenstein will help you hone in on what expenses apply to your business, and how to make the most of these deductions.

Common small business deductions

Advertising: 100 percent of costs associated with advertising and promotion of your business, including business cards, are deductible.

Business meals: business-related meals that can be supported with proper records (amount, date, location and business relationship of other diner(s)) are 50 percent deductible. *Tip: on the back of the receipt, write down the purpose of the meal, who you dined with and what you discussed.

Business insurance: business insurance costs can be deducted on Schedule C.

Car: if your vehicle is used solely for business purposes, all the costs associated with its operation can be deducted. More commonly, vehicles are used for business and personal use, in which case only the costs associated with business-related usage can be deducted. When you claim mileage for business use of your vehicle, there are standard mileage deductions that change yearly, or you can deduct actual costs. In 2018, the standard mileage rate was 54.5 cents per mile, while that amount has increased to 58 cents per mile in 2019.car

Charitable contributions: both corporations and individuals can deduct charitable contributions to qualified organizations on their tax returns.

Depreciation: large business items depreciate over their lifetime of use. Higher priced items with a longer life of use should be depreciated, rather than deducted upfront.

Education: costs associated with training or improving the knowledge and skills of you and your staff add value to your business and are fully deductible. These costs, for classes, seminars, subscriptions, books, workshops, etc., must increase your expertise in your current field, not qualify you for a different career.

Home office: the IRS has standardized this deduction—you can deduct $5 per square foot of your home that is used for your business. This amount maxes out at 300 square feet. It’s important that this area of your home qualify under three areas: exclusivity, regularity and precedence. This means that the area must be used exclusively for business, be used regularly for business operations or responsibilities, and be used as the principal place for conducting important business activities. A portion of renter’s or homeowner’s insurance can also be included in this deduction.home office

Insurance premiums: whether your business owner’s policy covers malpractice, flood insurance, cyber liability coverage, business continuation insurance or all of the above, the costs are fully deductible.

Interest and bank fees: interest that is incurred on business loans or credit cards, in addition to fees and bank charges on your business bank accounts, can be claimed on Schedule C.

Legal and professional fees: the fees charged by Simma Flottemesch & Orenstein to prepare your tax return are included in these deductible fees. These fees would also include any bookkeeping fees charged by a bookkeeper or bookkeeping service.

Medical expenses: as a small business, you may qualify to claim a tax credit up to 50 percent of premiums paid for employees, which would be a better tax break than a deduction. If you are self-employed and paying your own health insurance premiums, those costs are generally deductible. However, there are some exceptions, like if your spouse has an employer plan you could opt to participate in. Consult your tax professional to determine how this deduction applies to your specific situation.

Rent and utilities on business property: if your business operates in a rented space, the cost of renting the facility is fully deductible. Additional deductible utilities for the operation of this space include electricity, internet and phone charges (mobile or landline).

Salaries and wages: what you pay employees for salaries, wages, bonuses, commissions and taxable fringe benefits are deductible business expenses. Owners do not qualify as employees.

Supplies: business office supplies, furniture and other equipment are all deductible. It’s important to keep all receipts related to the purchase of these items. In today’s digital age, office electronics can also be included. Think of your laptops, tablets, smartphones and the software used to operate them in relation to business activities.supplies

Travel expenses: a business trip will only qualify as business travel if it is ordinary, necessary and away from the city or area in which you conduct business. Travel must last longer than one normal day’s work. Potentially, the deductible expenses from this travel may include transportation-related costs, meals, lodging, parking, tolls, tips, business calls, etc.

This list is by no means exhaustive, but it is a starting point for determining what business expenses are deductible on your return. Every scenario is different, and your tax professional will determine which deductions you qualify for. It’s important to keep records throughout the year of these expenses.

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Choosing a Business Structure: Types of Entities

You’re starting your own business, but what type of legal entity will you establish for the business? It can be difficult to balance the advantages and disadvantages of these structures. So let’s review the options and simplify those considerations:

Sole proprietorship:

A sole proprietorship is the simplest form of business entity. In this scenario, one person is responsible for the company, its profits and its debts. The most common way to structure your business, it is easy to form and gives complete managerial control to the owner. At the same time, the owner is then personally liable for all financial obligations to the business.

open sign

Partnership:

When the entity is owned by two or more individuals, it is a partnership. The partners agree to share in both the profits and losses of the business. These profits and losses are reported on the partners’ individual tax returns. However, each partner is still personally liable for the financial obligations of the business.

  1. Limited partnerships (LP): when one general partner has unlimited liability, and the other partners have limited liability. The limited liability partners also tend to have a limit on their controls over the company, as documented in a partnership agreement.
  2. Limited liability partnerships (LLP): limited liability is given to all owners of the company. An LLP protects partners from the partnership’s debts, so they are not responsible for the actions of their partners.

Limited liability company (LLC):

This business structure is a hybrid that limits personal liability for its owners, partners or shareholders, while enjoying the tax and flexibility benefits of a partnership. Therefore, personal assets will not be at risk if the LLC faces bankruptcy or lawsuits.

conference room

Corporation:

Corporations are viewed as entities that are separate from their owners. Therefore, a corporation has legal rights that are independent of its owners. Corporations come in five different types:

  1. C Corporations: these legal entities are separate from their owners. Therefore, they make profits, are taxed and can be held legally liable. Shareholders are provided with strong protection against personal liability, and the departure of a shareholder or sale of stock doesn’t disturb the continuation of business by the C Corporations.
  2. S Corporations: much like partnerships or LLCs, owners have limited liability protections and avoid double taxation by passing profits and some losses directly to the owners’ personal income while avoiding corporate tax rates. There are special limits on S Corporations.
  3. B Corporations: benefit corporations are driven by mission and profit. So while they service society in some way, they maintain a for-profit structure.
  4. Closed corporations: traditionally smaller companies with an informal corporate structure, closed corporations do not participate in public trading and are typically run by a few shareholders without a board of directors.
  5. Nonprofit corporations: organized for the purpose of charity, education, religious, literary or scientific works. As benefits to the public, they are tax-exempt.

Cooperative:

Cooperatives are owned and operated for the benefit of those using its services. Cooperatives are generally run by an elected board of directors or officers, while regular members have voting power to contribute to the direction of the cooperative. Members join by purchasing shares, but the amount of shares they hold does not increase or decrease the weight of their votes.

In our next blog, we will dive deeper into the advantages and disadvantages of these structures, and the tax implications of each. Visit the Simma Flottemesch & Orenstein blog to follow along.

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