It’s that time of the year. Tax time. And small business owners and entrepreneurs may be leaving hundreds of dollars off the table. Sometimes, entrepreneurs are unaware of the deductions that are available. So, I’m here to discuss some major and minor tax deductions you should take advantage of, if you are eligible.
Major Tax Deductions
Most people think claiming a home office deduction is an audit red flag, however it’s completely legal. If you do claim a deduction make sure you’re truly entitled to it. A simplified method allows for $5 a square foot up to 300 square feet of office space in your home. Be aware that there is a maximum deduction limit.
To qualify, you must use part of your home:
- Exclusively and regularly as your principal place of business
- Exclusively and regularly as a place where you meet or deal with patients, clients or customers in the normal course of your business
- On a regular basis for certain storage use or rental use
Fees associated with the startup of a business such as legal fees, accounting fees and consulting fees can be deducted up to $5,000 in the first year. The remainder of the costs must be amortized over a 15 year period.
New Business Equipment
Normally, business assets must be depreciated over the prescribed life of the asset determined by the IRS. The IRS has allowed accelerated depreciation including Bonus depreciation and section 179 depreciation which accelerates some portion of depreciation into the current year.
Minor Tax Deductions
Meals and Entertainment
This is a popular yet often overlooked tax deduction. All meals and entertainment that are either directly related to or associated with businesses are deductible at 50 percent. Besides meals, expenses for any activity considered to provide entertainment, amusement or recreation generally fall into this category. It’s imperative that they are truly used for business purposes. This can be for clients, potential clients and employees. However, there are meal expenses that are 100 percent deductible. This includes recreational expenses primarily for employees who are not highly compensated. A business holiday party or company picnic and office snacks and meals provided to employees for the employer’s convenience. One example would be when working long hours or weekend if the employer brings in meals so the employees can stay on premise.
To be eligible, you must use your vehicle to go from your home office or a separate place of employment to a different area for business. There are two methods of deduction. The first is a simplified method that calls for standard mileage deduction with a rate provided by the IRS. Essentially this deduction is the business miles you traveled multiplied by a standard rate provided by the IRS. There could be an opportunity to use the actual cost of use method which uses all expenses related to the betterment of the vehicle and dividing the amount of miles used for business. With both methods the commute to and from work is not included as a tax deduction.