As a tax professional, I’ve seen it all when it comes to tax deductions – from the ordinary to the, well, let’s say ‘creatively ambitious’ when it comes to small business deductions — like claiming a pet as a ‘security expense’ or insisting that a daily cappuccino is essential to business survival.
While these examples might make you chuckle, they underscore a serious point: It’s easy to get caught up in pitfalls with business deductions (some more humorous than others). Navigating the world of deductions is crucial not only to avoid the glaring eye of the IRS but to make sure you’re also capitalizing on legitimate deductions.
So, let’s sift through the ridiculous to focus on the realistic, so you can steer clear of costly mistakes and capitalize on the deductions that rightfully benefit your Greater Seattle business.
Mixing Business and Personal
A common misstep in small business deductions is mixing personal and business expenses. Things get messy when you don’t, making you vulnerable to penalties. For example, claiming a personal vacation as a business trip is an easy way to get the IRS’s attention and end up facing an audit.
Smart Move: Draw a clear line. Ensure every expense claimed under small business deductions is strictly business-related. When in doubt, leave it out.
Overestimating Expenses
Overestimating expenses is a big pitfall when it comes to small business deductions. Overclaiming things like office supplies or office space if you work from your King County home can lead to potential problems… and IRS scrutiny.
Smart Move: Keep it real. Precise and accurate reporting of expenses is essential.
Inadequate Documentation
Failing to document expenses can complicate deduction claims, often meaning you can’t make the claim, which affects your tax obligation.
Smart Move: Document meticulously. Keep receipts, invoices, and logs. Proper documentation is vital for successful small business deductions.
Misclassifying Employees as Independent Contractors
Incorrectly classifying employees as contractors can lead to big penalties with employment taxes. Not to mention that the IRS is cracking down on this more than ever with the burgeoning gig economy.
Smart Move: Classify with care. See the IRS’s updated guidelines on the differences between employees and contractors (and this is something I’m happy to help with).
Claiming Non-deductible Expenses
Some items are unequivocally off-limits with deductions. Aside from the attempted deductions for fines and penalties, other common missteps include personal grooming expenses, gym memberships (unless directly related to your business), and family vacations masquerading as business trips. These can not only invite scrutiny from the IRS but can also lead to disallowed deductions and penalties.
Smart Move: On the flip side, there are numerous legitimate expenses that you can and should be capitalizing on. Some of the most commonly overlooked yet perfectly allowable small business deductions include:
- Home office expenses. If you use a portion of your home regularly and exclusively for business, you can deduct expenses like mortgage interest, insurance, utilities, repairs, and depreciation.
- Vehicle use. When used for business, expenses related to your vehicle – such as gas, maintenance, and depreciation – can be deducted. Remember to keep a detailed log of business versus personal use.
- Equipment and supplies. Items purchased for business use, from computers and software to office supplies, can typically be deducted.
- Professional services. Fees for legal, accounting, and other professional services directly related to your business operations are deductible.
- Education and training. Costs associated with business education, such as workshops, seminars, and conference fees, can often be claimed.
- Travel and meal expenses: Business travel costs, including flights, hotels, and a portion of meal expenses, are deductible. However, there are some nuances with that and the IRS has even stricter guidelines with these. So ensure these are genuinely business-related and well-documented.
Even though there’s still a little time before you have to file for next year’s taxes, understanding small business deductions can save you both time and money.
An improperly filed tax return, especially with deduction mistakes, can cause problems with refunds or make you vulnerable to an audit. With a little careful planning, accurate documentation, and the right approach, you can prepare confidently for tax season, and keep yourself out of future messes you may have fallen prey to before.
And remember, I’m here with guidance for you, to make sure you’re staying out of future trouble, as well as helping you fix any trouble you’re already in:
In your corner,
Christopher Chapman