Small Business Deductions Checklist

 I was featured in an article that focused on the top write offs for business owners.  In the Top Ten Write Offs for the Self-Employed  some of the business deductions were highlighted. However, when some entrepreneurs look at tax forms, schedules, and instructions they can become overwhelmed.

The first step in not being overwhelmed is finding out if you need to file Schedule C or C-EZ . View this video from the IRS to see if you need to file it:

The next step is creating a plan to take advantage of all the business deductions applicable to your small business. For those who have a separate brick-and-mortar establishment, the most expenses listed on Schedule C are very straightforward. For people who have home based businesses, virtual entrepreneurs, or business nomads (people who work from public places like coffeehouses or rent meeting spaces as needed), there are some gray areas that have to be examined.

This Small Business Deductions Checklist is designed to be a Schedule C and Schedule C-EZ Guide for those who need help identify what expenses are applicable to their business and to explain those “weird” deductions.

Business Use of Home
Documents Needed

  • Rent receipts ,cancelled checks, mortgage statements
  • Utility bills: heating, gas, water, internet
  • Insurance Statements
  • Layout or blue print of dwelling (for your records if IRS asks).

Whether you rent or own, if you can deduct part of your housing costs if you have a dedicate space or room for your home office.   This expense is calculated on Form 8829 (line 30 on Schedule C). To calculate your home office deduction:

Total Area (Square Feet) of Living Space ÷ Area Size of Home Office= Business Home Use %

Cell Phone/Telephone
Documents Needed

  • Cell phone bills for past year

Do you have a separate business telephone or cell phone dedicated for your business? Deduct it! Are you using your personal cell phone for business? If so, you and I have something in common: a tax deduction is available for our use. This expense should be monitored and calculated on a monthly basis. To calculate your business cell phone use:

Total Cell Phone Bill ÷ (Total Cell Minuets Used –Personal Calls Made) = Business Cell Use %

Supplies or Office Equipment
Documents Needed

  • Receipts for purchased over the last year.
  • Warranties and vendor contracts.

Some business owners believe that a printer is a business expense when it is really a piece of office equipment. This is the most common error I see when I review accounts for clients. To determine whether or not something you purchased for your business is supplies or office equipment ask yourself these questions.

1). How long do you think you can use the item? If it is 2 or more years, then it is probably a piece of office equipment.

2). If it breaks, are you more likely to replace or repair it? If you decide to replace it, it should be considered a part of supplies. If you repair it, it’s office equipment.

Also, most businesses set a dollar limit to help determine whether to classify a purchase as an expense or an asset (i.e. office equipment and furniture). My rule of thumb to my clients: Anything over $200 should be review with the two questions above. Everything under $200, just expense it!

Software /Online Cloud Subscriptions
Documents Needed

  • User Agreements
  • Billing Statements

Cloud computing has grown tremendously to suit the needs of the small business owners. I encourage small business owner to consider solutions in the cloud as often as I can. Some services are free, others you have to pay for. If you pay for cloud solutions like QuickBooks and Zoho, deduct the monthly fee and taxes on your taxes as a software license fee.

Also, monthly maintenance fees for your website are deductible.

If have to purchase software, it is possible you can deduct the full cost on your taxes. There is also a possibility it may have to be depreciated (or its cost recognized over time) over 36 months. The Section 179 Deduction is a massive piece of IRS Tax Code that tries to include all capital assets, but has many restrictions. Welcome to the magical world of the IRS! To the average, hard-working entrepreneur Section 179 is most applicable to software purchases. However there are some requirements that have to be met in order to deduct it:

For basic eligibility, the software must meet all of the following general specifications*:
1.The software must be purchased outright by you.
2.You have to use the software in your business to earn revenue.
3.You have to be able to determine how long you will use it.
4.The software must be expected to last more than one year.

In addition, these three specific stipulations must be met*:
1.The software must be “off the shelf”.

2.The software can be used by multiple users.

3.The software cannot be customized to suit your business.

*Translated in to plain English from http://www.section179.org/section_179_and_software.html.
Auto Expenses & Mileage
Documents Needed

  • Loan or lease agreement
  • Repair and Service Receipts
  • Gas station receipts
  • Mileage log(s)
  • Date book or calendar

If you have a vehicle that is used for business and personal functions, only the business use is deductible. You will have to keep record of each time it was used for business. I have yet to see a “multi-purpose” vehicle is used for 100% business. Neither has the IRS!

There are two methods of claiming expenses for a use of a vehicle:

1. Actual expense method is the business portion of all cost associated with a vehicle.  This method provides a larger deduction if you are using a newer vehicle. Also, if you use the actual expense method, the vehicle can be depreciated. You have to determine the actual cost of operating the vehicle. Vehicle operation costs include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation and payments, attributable to the portion of the total miles driven that are business miles.

2.Standard mileage rate method’s  calculation is:

Total Business Miles Driven × Standard Mileage Rate= Business Mileage Deduction

Business Mileage Deduction + Tolls and Parking Fees= Total Business Vehicle Deduction

The standard mileage rates are 56.5 cents (2013) and 55.5 cents (2012). The IRS requires that if you use the standard mileage rate, you have to keep a record of all miles driven in that particular vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity.

Business Meals and Entertainment
Documents Needed

  • Cash Register Receipts or Order Confirmation

You might decide to “wine and dine” clients, throw an office party for your employees, or treat yourself to a dinner for landing a major client. Regardless of the reason: only 50% is deductible for business tax purposes. If you paid cash, do not let this happen too often. The IRS requires a proof of purchase or receipt of all expenses over $50.

Professional services
Documents Needed

  • Signed Service Contract
  • Cancelled Check ,Bank Statement, or Receipts

Have you hired an independent contractor during the year?  Hired a new accountant or CPA? You can deduct what you paid them in full on Schedule C. But you have to fill out some paperwork to get the deduction. You must issue a Form 1099-MISC to IRS and the contractor by January 31st of the following year.

Membership Dues
Documents Needed

  • Proof of membership
  • Cancelled Check ,Bank Statement, or Receipts

Are you a member of a business club or group? Do you rent meeting or office space as needed? Those dues and fees are fully deductible!

Credit Card Interest
Documents Needed

  • ·Monthly Statements

Do you use a credit card for business purchases? If so, the interest charged on the card is fully deductible. Used your personal card for business? Assign the appropriate interest amount for the business deduction.

Charitable Contributions:
Documents Needed

  • Cancelled Check
  • Receipt or letter from organization that received donation

Giving back to your community has both social and financial benefits. That feeling you will get when giving to a local nonprofit is surreal.  You will probably feel even better knowing that you can deduct your contribution in full on the business tax return.

Hopefully I gave you some insight as to the tax planning that is necessary as a business owner. Have a question about a deduction? Need clarification on a deduction I did not review? Post a question or shoot me an email!

Jéneen R. Perkins is a freelance accountant and consultant serving entrepreneurs, families and small businesses. She prides herself in being fluent in English instead of “Accountant-ese”.

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