That Expense Was Business-Related – Can I Deduct It?

Business owners share the common goals of maximizing sales and minimizing expenses. But when it comes time to prepare income tax returns, their focus shifts to maximizing expenses in order to make the most of write-offs. Entrepreneurs typically look for opportunities for deductions in every area of the business. This can prove beneficial to boosting their bottom line.

Unfortunately, not all business purchases are tax-deductible. An entrepreneur is confronted with limitations on deducting several types of expenditures that may seem like legitimate costs of doing business. Keep in mind, simply having your business pay for these things does not make them tax-deductible.

Customer Relations

Tax-deductible business meals are arrangements where the primary purpose is conducting business. Buying lunch for a customer so that business matters may be discussed is a deductible business expense. Dining solo is not. Stopping for lunch alone between business appointments is not tax-deductible. This holds true even if you would have avoided the restaurant cost were it not for your appointment schedule outside the office. The exception is meals you consume while traveling overnight away from home for business purposes. Additionally, only half of the cost for business meals is tax-deductible.

Giving gifts to customers is a common business practice. It builds goodwill and aims to garner referrals. But the IRS limits the tax deduction of a business gift to $25 per person for each gift. So if you give a gift of $100 to a customer, your deduction is limited to $25.

Appearances at Meetings

Getting to business meetings using your personal vehicle triggers a tax deduction based on the miles driven. Don’t count the miles commuting from home to your principal place of business. Going to a meeting before going to your office necessitates a little arithmetic. To determine the business miles, subtract the home-to-office commuting distance from the miles driven between home and the meeting location.

Looking sharp for a business meeting is certainly beneficial. Maybe you always prefer casual clothing, except when seeing customers. Nevertheless, clothing adaptable to other situations is not a tax-deductible business expense. Only uniforms, including clothing with a company name or logo, are deductible. Nothing else you buy that is common attire for occasions other than business is eligible for tax deduction.

Protection from Trouble

Life insurance on a business owner is definitely prudent, especially when the company is expected to survive the current owner. Tax deduction of the premiums is not allowed if the business is the policy beneficiary. If the owner’s heirs are the beneficiaries, the business may deduct the premiums, but doing so could be unwise as it jeopardizes the future income tax exclusion of life insurance death benefits.

Keeping out of trouble with the law is clearly a crucial business matter. But fines and penalties levied on an enterprise are not tax-deductible. A penalty for late payment of a tax assessment must be accounted for separately from the tax itself. You cannot deduct the penalty. Likewise, no deduction is allowed for parking tickets or traffic citations issued when traveling for business, such as making deliveries or attending meetings.

To ensure appropriate accounting, consult with your financial professional regarding deductions for your particular circumstances.

Self-Employment Taxes: Watch Out for the Double Whammy

Freelancers and small-business owners alike are required to make quarterly estimated tax payments. If you’re in this boat, you’ve probably noticed that Q1 estimated payments have the same deadline as the tax return for the previous year. If you owe more tax for the previous year, plus an estimate for the current year, this date can loom large on the calendar.

Fortunately, you can take steps to make these tax payments go smoothly. A good tax accountant can prepare your quarterly forms to send with estimated tax payments. Additionally, he or she can help complete tax returns on time so your estimated tax forms are ready when the first payment is due.

To estimate your tax for this year, your accountant can use the prior year as a guideline. In fact, the IRS permits you to avoid an underpayment penalty by paying estimated tax payments the current year that are equivalent to your tax from the prior year.

A byproduct of this “safe harbor” method is that you might eventually owe more tax (without penalty) if profit is higher in the current year than it was in the previous year.

To avoid this additional payment in Q1, your accountant can use an alternative process of estimating this year’s tax by projecting current-year profit. This makes accurate current-year records essential, so an optimal forecast of this year’s profit can be made. This includes up-to-date tracking of business revenue and expenses. In other words, don’t wait to identify your profit for this year until the tax return is due next year. Remain in regular contact with your accountant in order to manage these numbers and avoid surprises at the end of Q1.