20 (Plus) Deductions You May Have Overlooked -- And Shouldn't
Even after countless rounds of tax reform, many deductions remain for the self-employed entrepreneur. Remember that if some item, service, or fee is a legitimate cost of doing business, you should deduct it. Don't be swayed by reports that many write-offs are audit targets. Legitimacy can vary from business to business; you have to be honest with yourself about whether a particular expense really is a business expense. And you have to hold on to receipts, records, and notes to document your deductions.
So peruse the following list, see what deductions you didn't take this past year that you could have, take what's coming to you in the coming years, and start keeping good records today.
The obvious stuff. Paper, pens, copying costs, business cards, computer disks, and the like--any supplies, services, or tools that you must have to run your business are eminently deductible.
The home-office deduction. This deduction scares most people away, because it's a haven for tax cheats and a beacon for tax auditors. But anyone who legitimately runs a business out of a home office would be foolish to ignore this deduction--it's worth a lot of money. Does your home office meet IRS requirements of regularity and exclusivity? (You must use the space regularly to run your home-based business, and you must use it for that purpose exclusively--no kids playing games at the computer.) If you can comply with IRS rules, you can deduct real estate taxes, mortgage interest, casualty losses, utilities, insurance, depreciation, painting, and repairs. Just prorate any deduction by the ratio of home-office square feet to total home square feet.
Office furnishings. When it comes to deductibles, you've probably got a lot more than just a desk and a bookshelf. That means curtains, posters, trash cans, clocks, lamps, file cabinets, and anything else you buy for your home office. For most small businesses, up to $10,000 of new furnishings and equipment can be written off in the year that they're purchased (it's called a section 179 deduction), as long as that deduction doesn't produce a loss. Used items, such as a desk and chair, can be depreciated from their value when they entered the business, but they can't be deducted.
Cleaning. Having someone clean your house, including your home
office, once every week or two is a luxury I highly recommend. It not
only forces you to organize and straighten up regularly, it allows you
to deduct a prorated portion of the cleaning bill on your Schedule C.
Sorry, you can't deduct any landscaping or yard work, even if you
regularly see clients at home and want to make a good impression.
Computer equipment. Of course your computer, printer, and modem are legitimate business expenses, but if you use them for personal tasks you can jeopardize their deduction. Keep a log of business time and personal time on the computer, and prorate your equipment deduction by the percentage of time that it is used for business purposes. If you use the computer less than half the time for your business, you can no longer deduct its cost, and depreciation becomes restricted. In the long run, it's cheaper and easier on the equipment to reserve your system for your business, and use the savings to buy your kids a computer for their video games and school reports--and perhaps for your own personal finances as well.
Phone service. If you use your personal line for business calls, you cannot deduct your basic service, but you are allowed to deduct all long-distance business calls and any service enhancements, like call waiting, that you require just for business. Of course, if you add an extra line and use it exclusively for business calls and fax or modem transmissions, you can deduct its full cost, even if it's a residential line. In addition to providing a deduction, a separate line is often easier to manage and can help you appear more professional.
Telecommunicating. If you use on-line services or bulletin boards for business reasons like finding customers or doing research, you can deduct the portion of your connect and subscription charges that is work related. If you have a special business reason for getting certain premium television channels (such as a journalist who has to watch CNN), you can deduct that, too.
Contributions to retirement accounts. If you haven't set up a retirement plan for 1991, do it today: The sooner you contribute, the more your money grows. For instance, you have until your tax return is due to establish a SEP-IRA (simplified employee pension) for the previous year. In contrast, Keogh plans must be started by December 31. Contributions you make on behalf of employees come directly off of your Schedule C (and reduce self-employment taxes as well as income taxes.) Contributions you make for yourself are taken off of your 1040 form.
Health insurance. If your business is a regular C corporation, you can write off your health-insurance premiums as an employee benefit. If you are a sole proprietor, a partner, or an S corporation owner, you can deduct 25 percent of your health insurance premiums on line 26 of your regular 1040 form, as long as you have no other means of getting health insurance and as long as this deduction doesn't exceed your net business income.
Disability insurance. If you are a C corporation, you can deduct this as an employee benefit, too. Indianapolis certified financial planner F. David Bixler has noted that if your health and disability insurance bills are high enough, they could help make incorporation worthwhile.
Self-employment taxes. This deduction was new in 1990. You can deduct half of your 15.3 percent self-employment tax payments on line 25 of your 1040 form.
Interest. This is tricky, but it's worth learning the nuances, according to Fred Birks, a CPA in the Washington, D.C., firm Birks & Co. If you take the home-office deduction, you can prorate a portion of your mortgage interest and take it on your Schedule C. That saves you some money, because the bottom line on your Schedule C determines your self-employment tax bill. The same goes for a home-equity loan that is used in your business; if you borrow against your house to buy business equipment, you can take the interest on that loan as a business expense. For big borrowers this has an extra benefit: Home-equity borrowing to finance your business doesn't count against the $100,000 cap on interest-deductible home-equity debt.
Gifts to clients. If you brought your best clients a Christmas or New Year's gift like a cheese basket or bottle of wine, that's deductible. Just remember not to deduct more than $25 on each gift.
Entertainment. Be prepared to justify meals and entertainment cost by keeping a log of whom you dined with and what you discussed. And be prepared to swallow 20 percent of the cost of tickets and meals without deducting them. If you entertain business associates in your home, 80 percent of those costs are deductible, too--but this practice may trigger an audit.
Making a good impression. What if you're asked to be on a television show to talk about your business, and you really want to look good? You could deduct payments to a video trainer, who will tell you to wear a blue shirt and a red tie. But you couldn't deduct the shirt or the tie, since you could wear them in other situations.
Maintenance and repairs. You might want to take your compuer and other home-office equipment in for a yearly cleaning and checkup; those would be deductible. Also keep trake of such purchases as toner.
Magazine subscriptions. Your subscription to HOME-OFFICE COMPUTING and any other publications that help you run your business or keep uo with developments in your field are entirely deductible.
Local transportation. You can deduct business miles on your car at a rate of 26 cents per mile for 1990 taxes and 27.5 cents for 1991. You can also deduct bus, subway, and taxi fare for in-town traveling to meetings, offices, restaurants, and stores when you are on a business mission. You don't need receipts for every bus trip or cab fare, but you need contemporaneous records.
Business trips. If you went to Florida for a week to take the kids to Disney World and see your mother, and stopped off on the way to take a client to lunch, you can deduct the lunch, or 80 percent of it, anyway. If you went to Florida for a convention and took your mother to lunch, you can deduct the trip, and 80 percent of your lunch, but not your mother's. There are strict rules about prorating trips when you combine business and pleasure, and if you did go to Disney World, you might see Jiminy Cricket, who would tell you always to let your conscience be your guide.
More and more deductions. Add professional dues, airline-club memberships, special uniforms, child care (even if you work at home), business checking-account fees, continuing-education courses, computer software, collection-agency fees, overnight-delivery charges, and reference books. Happy deducting!
Even after countless rounds of tax reform, many deductions remain for the self-employed entrepreneur. Remember that if some item, service, or fee is a legitimate cost of doing business, you should deduct it. Don't be swayed by reports that many write-offs are audit targets. Legitimacy can vary from business to business; you have to be honest with yourself about whether a particular expense really is a business expense. And you have to hold on to receipts, records, and notes to document your deductions.
So peruse the following list, see what deductions you didn't take this past year that you could have, take what's coming to you in the coming years, and start keeping good records today.
The obvious stuff. Paper, pens, copying costs, business cards, computer disks, and the like--any supplies, services, or tools that you must have to run your business are eminently deductible.
The home-office deduction. This deduction scares most people away, because it's a haven for tax cheats and a beacon for tax auditors. But anyone who legitimately runs a business out of a home office would be foolish to ignore this deduction--it's worth a lot of money. Does your home office meet IRS requirements of regularity and exclusivity? (You must use the space regularly to run your home-based business, and you must use it for that purpose exclusively--no kids playing games at the computer.) If you can comply with IRS rules, you can deduct real estate taxes, mortgage interest, casualty losses, utilities, insurance, depreciation, painting, and repairs. Just prorate any deduction by the ratio of home-office square feet to total home square feet.
Office furnishings. When it comes to deductibles, you've probably got a lot more than just a desk and a bookshelf. That means curtains, posters, trash cans, clocks, lamps, file cabinets, and anything else you buy for your home office. For most small businesses, up to $10,000 of new furnishings and equipment can be written off in the year that they're purchased (it's called a section 179 deduction), as long as that deduction doesn't produce a loss. Used items, such as a desk and chair, can be depreciated from their value when they entered the business, but they can't be deducted.
Computer equipment. Of course your computer, printer, and modem are legitimate business expenses, but if you use them for personal tasks you can jeopardize their deduction. Keep a log of business time and personal time on the computer, and prorate your equipment deduction by the percentage of time that it is used for business purposes. If you use the computer less than half the time for your business, you can no longer deduct its cost, and depreciation becomes restricted. In the long run, it's cheaper and easier on the equipment to reserve your system for your business, and use the savings to buy your kids a computer for their video games and school reports--and perhaps for your own personal finances as well.
Phone service. If you use your personal line for business calls, you cannot deduct your basic service, but you are allowed to deduct all long-distance business calls and any service enhancements, like call waiting, that you require just for business. Of course, if you add an extra line and use it exclusively for business calls and fax or modem transmissions, you can deduct its full cost, even if it's a residential line. In addition to providing a deduction, a separate line is often easier to manage and can help you appear more professional.
Telecommunicating. If you use on-line services or bulletin boards for business reasons like finding customers or doing research, you can deduct the portion of your connect and subscription charges that is work related. If you have a special business reason for getting certain premium television channels (such as a journalist who has to watch CNN), you can deduct that, too.
Contributions to retirement accounts. If you haven't set up a retirement plan for 1991, do it today: The sooner you contribute, the more your money grows. For instance, you have until your tax return is due to establish a SEP-IRA (simplified employee pension) for the previous year. In contrast, Keogh plans must be started by December 31. Contributions you make on behalf of employees come directly off of your Schedule C (and reduce self-employment taxes as well as income taxes.) Contributions you make for yourself are taken off of your 1040 form.
Health insurance. If your business is a regular C corporation, you can write off your health-insurance premiums as an employee benefit. If you are a sole proprietor, a partner, or an S corporation owner, you can deduct 25 percent of your health insurance premiums on line 26 of your regular 1040 form, as long as you have no other means of getting health insurance and as long as this deduction doesn't exceed your net business income.
Disability insurance. If you are a C corporation, you can deduct this as an employee benefit, too. Indianapolis certified financial planner F. David Bixler has noted that if your health and disability insurance bills are high enough, they could help make incorporation worthwhile.
Self-employment taxes. This deduction was new in 1990. You can deduct half of your 15.3 percent self-employment tax payments on line 25 of your 1040 form.
Interest. This is tricky, but it's worth learning the nuances, according to Fred Birks, a CPA in the Washington, D.C., firm Birks & Co. If you take the home-office deduction, you can prorate a portion of your mortgage interest and take it on your Schedule C. That saves you some money, because the bottom line on your Schedule C determines your self-employment tax bill. The same goes for a home-equity loan that is used in your business; if you borrow against your house to buy business equipment, you can take the interest on that loan as a business expense. For big borrowers this has an extra benefit: Home-equity borrowing to finance your business doesn't count against the $100,000 cap on interest-deductible home-equity debt.
Gifts to clients. If you brought your best clients a Christmas or New Year's gift like a cheese basket or bottle of wine, that's deductible. Just remember not to deduct more than $25 on each gift.
Entertainment. Be prepared to justify meals and entertainment cost by keeping a log of whom you dined with and what you discussed. And be prepared to swallow 20 percent of the cost of tickets and meals without deducting them. If you entertain business associates in your home, 80 percent of those costs are deductible, too--but this practice may trigger an audit.
Making a good impression. What if you're asked to be on a television show to talk about your business, and you really want to look good? You could deduct payments to a video trainer, who will tell you to wear a blue shirt and a red tie. But you couldn't deduct the shirt or the tie, since you could wear them in other situations.
Maintenance and repairs. You might want to take your compuer and other home-office equipment in for a yearly cleaning and checkup; those would be deductible. Also keep trake of such purchases as toner.
Magazine subscriptions. Your subscription to HOME-OFFICE COMPUTING and any other publications that help you run your business or keep uo with developments in your field are entirely deductible.
Local transportation. You can deduct business miles on your car at a rate of 26 cents per mile for 1990 taxes and 27.5 cents for 1991. You can also deduct bus, subway, and taxi fare for in-town traveling to meetings, offices, restaurants, and stores when you are on a business mission. You don't need receipts for every bus trip or cab fare, but you need contemporaneous records.
Business trips. If you went to Florida for a week to take the kids to Disney World and see your mother, and stopped off on the way to take a client to lunch, you can deduct the lunch, or 80 percent of it, anyway. If you went to Florida for a convention and took your mother to lunch, you can deduct the trip, and 80 percent of your lunch, but not your mother's. There are strict rules about prorating trips when you combine business and pleasure, and if you did go to Disney World, you might see Jiminy Cricket, who would tell you always to let your conscience be your guide.
More and more deductions. Add professional dues, airline-club memberships, special uniforms, child care (even if you work at home), business checking-account fees, continuing-education courses, computer software, collection-agency fees, overnight-delivery charges, and reference books. Happy deducting!
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