Many profitable companies, including startups, are paying more in taxes than they should solely because they are not accounting for all expenses that they are legally allowed to deduct, including home office, internet, cell phone and car expenses. Understanding how to properly record and categorize expenses, and differentiate between business and personal expenses is key to minimizing tax liability.
Record Expenses When They Occur
Keeping track of what your business spends money on is hard enough, so do not wait until the end of each month or even the end of the year to try and go back and remember what you spent and when. In the end, you will probably end up forgetting about many expenses that were incurred.
If you are unable to record the expenses right away, at a minimum, you should at least save the receipts so they can be used to help you go back and record your transactions. With online banking making it easier to access transactions, many times we can see where we purchased something, but we need the underlying receipt to give us more details on the transactions. Additionally, under audit, the IRS will ask for receipts to support the expenses you are taking. Then at the end of each month, make sure you reconcile your cash account to your bank statement to make sure there are not any discrepancies.
Categorize Expenses
Being able to categorize expenses into categories can save you time and money in the long run. If you give all the receipts that your company had over the year, and ask your CPA to prepare your taxes, it is going to take them a lot longer than if you had them categorized. Once all the expenses are sorted into different categories your CPA will review and determine if all the expenses are deductible. One thing to note: if there are expenses that you are not sure how to categorize, most accounting systems have an “Ask your accountant” account which could be used as a placeholder until you can discuss those transactions in more detail with your advisor.
Know What Expenses Can be Taken
Having an understanding as to what expenses you can take in your business is also very important. Almost all expenses that occur in a business for it to function can be used as an expense, but your CPA can determine whether these expenses are fully, partially, or completely non-deductible under current tax law. Many people understand the basic ideas of what can and what cannot be taken against their company’s income, such as advertising, employee wages and compensation, rent, repairs, legal services, supplies, taxes and more, but there are many other expenses that are overlooked each year. A few of these expenses are listed below.
Home Office
There are a few different ways to calculate your home office deduction using the simplified or regular method, but under each method there are a few things you do need to make sure you have documented in order to take a deduction:
- You must regularly use part of your home exclusively for conducting business and not for personal use.
- This area in your home must also be considered your “regular” place of business. What this means, is that you cannot have another office/workspace that you could go to in order to perform your work. If you do have a space at the office, that automatically excludes you from this deduction.
Internet/WIFI
If you have internet or WIFI in your office building, you can write off this expense. In addition, if you use your home internet for your business and for personal use, you can potentially take the percentage of internet used for business as an expense, but you do need to determine how much of that expense relates to personal use.
Cell Phones
The same rules that apply to your internet/WIFI, also apply to cell phones. If it is used exclusively for business, then all expenses can be deducted. If it is only used partially for business and the rest for personal, the percentage that is used for business purposes can be taken as an expense.
Car/Auto Expenses
Any vehicles used/purchased for business can also be deducted against your income. Similar to the home office deduction, there are two methods in order to take a vehicle deduction: the mileage and actual methods. Your CPA can review and evaluate which deduction will be best for you given your individual situation, but in order for them to determine that, you should keep track of the following information:
- Fuel cost
- Business miles driven
- Personal miles driven
- License fees
- Insurance
- Repairs
- Anything else that is used to keep the vehicle running for your business
Travel
When traveling for business, it is important to keep track of all expenses that you have. A wide variety of expenses during travel are deductible to a business, anywhere from how you got there, such as bus, flight or train, to what you ate, to what means of transportation you used while you were there could all potentially be deductible on the business level.
As we discussed, the key to deducting expenses is to make sure you are keeping receipts and recording transactions in a timely manner, so you do not miss anything. You want to make sure you over document and ask questions if there are any expenses you are not sure about. If you have any questions about if something qualifies as a deductible business expense, contact an Anders advisor.
