I'm switching things up this time around by having my husband, Trevor (a.k.a. my personal accountant/CFO for Heritage), share some tax wisdom with you all! He works as a tax accountant and seriously loves what he does. He is known to geek out over Excel spreadsheets and loves making accounting a bit more understandable for the rest of us.
I often tell people that my husband and I have created a great partnership with Heritage Creative Co. - I think I get to do the fun side (all things creative as the designer) and my husband would argue that he actually gets to do the fun side.
I know the financial parts of owning a small business can be overwhelming so I thought I would have him write a blog post specifically on deducting small business expenses and getting yourself set-up for filing your taxes (stay tuned for more filing tips as tax season approaches).
Take it away, Mr. Heritage!
If you ever have an accounting exam that has multiple choice questions, here’s a hint: The right answer will never include the words “always” or “never”, because there are always exceptions in the world of tax. So to make this blog post sound nothing like you’re reading the tax code, I won’t mention every scenario where things may apply differently and use words like “Typically” and “Usually”.
If you own a small business, you’ve probably wondered which items you can deduct. Here are some common items that often come up around tax filing season.
1. Cell phone
If you do business on your phone, part of its cost can be deductible. Typically you would estimate the percentage of its use that is used for business and deduct that amount of the phone cost, including the actual phone cost and monthly data charges.
2. Mileage/Actual Car Expenses
If your home is your main place of business, you can deduct the greater of mileage driven for business or actual car expenses. Unless you use your car solely for business, you’re typically going to have a hard time supporting that your actual gas expense was 100% for business purposes. It’s much easier to show records listing mileage for business trips. Business miles can be deducted at 58 cents per mile for 2019 so it usually ends up being a better deduction doing mileage instead of actual expenses.
3. Home Office
This deduction is one that is commonly misunderstood and can signal a red flag to the IRS if done incorrectly. The IRS allows a deduction for the exclusive and regular use of a home office. You can’t use the office space for personal use to qualify for the deduction. Your home has to be your principal place of business. There are two methods of calculating the home office deduction. The first is to multiply actual expenses (rent, utilities, etc.) by the percentage that your home office is compared to the entire home, as determined by square footage. Was that confusing? The second method simplifies things. Rather than calculate the actual expense the IRS allows a safe harbor deduction of $5 per square foot of the home office. A “safe harbor” essentially means that the IRS won’t question it. If you qualify for the deduction and want to calculate out the amount of actual expenses that should be apportioned and it ends up greater than the safe harbor and you have support for it, by all means deduct the actual expenses. It is typically easier and ends up being more beneficial to do the safe harbor method.
Food and drink are only 50% deductible. There is no such thing as a free lunch.
Entertainment (tickets to shows/events, etc.) are not deductible.
6. Bonus Depreciation
Certain purchases that provide benefit over multiple years are required to be capitalized (i.e. deducted over multiple years instead of fully in the year of purchase). Examples would be a computer or printer. Starting in 2018, all assets (for purposes of a small business) can be fully depreciated in the year of purchase through 100% bonus depreciation. So if you buy a computer and expense it as a supplies expense this would be technically incorrect, versus adding it to your depreciation schedule and deducting it via bonus depreciation. Both get the full deduction in the first year so it may not actually change the tax due on your return. However, any way to reduce the chance of the IRS flagging your return is a good thing.
Feel free to comment on this blog post or on the Heritage Instagram if you have further questions. I’ll calcu-later (for those Parks & Rec fans)!