Top Six Deductions for Business Owners

Owning a business is totally different from working for someone else. One major way it is different is because business owners receive many more tax deductions than employees. In fact, just about every penny a business owner spends in order to make money in the business is tax deductible.

1. Business mileage

When you work a job, your cost for transportation to and from work- called “commuting” is not deductible. Commuting is not deductible for business owners either. But all transportation related to business is deductible for business owners. That’s why it is so important to keep up with your transportation receipts and/or mileage.

 

The 2014 standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 56 cents per mile for business miles driven, 23.5 cents per mile driven for medical or moving purposes, and 14 cents per mile driven in service of charitable organizations.

 

Remember that you don’t count commuting when you figure your business mileage. But what is a commute and how do you figure it? Your commute is travel from your home to your place of business. Commuting is easy to figure if your place of business is a location separate from your home. But what if your business is in your home? 

 

Believe it or not, if you have a home based business, your commute is from your bedroom to your office! That means any travel for business outside your home would be deductible if you keep good records. 

 

How to keep good mileage records

If you drive your car for business and personal purposes, keep a journal or calendar. Record the date, your car’s mileage at the beginning of your business travel and its mileage at the end. List the customers or prospects you saw, or other business purpose(s) for the travel (such as picking up supplies, running other business errands, etc.) Subtract each day’s beginning mileage from the ending mileage, and the result is your deductible business mileage for that day. Keep your calendar or journal in your glove compartment for quick easy access. If you have more than one vehicle, keep a journal in each one! 

 

2. Deducting Your Business Phone

Deducting business phone expenses depends on whether you have a sole proprietorship or not. If you have a sole proprietorship, one phone number is assumed to be a non-deductible personal line. All other business phone numbers you pay are deductible. If you have a corporation, partnership or LLC, every business line paid for by the business is deductible.

 

3. Meals

Most business owners try to deduct their personal meals as a business expense. However personal meals are not deductible! In order for business meals to be deductible, four pieces of information must be written on each food receipt. The date the meal was purchased, the name and address of the restaurant, the total amount of the meal including tip, and the meal’s business purpose. The business purpose of the meal is the information item usually left out most often. But it is a very important piece of information because it means the difference between a non-deductible personal meal and a deductible business meal. Don’t forget to list the name of the customer you bought the meal for. The easiest way to correctly keep meal receipts is to immediately write any missing required information on the receipt as soon as you get it. Of course the I.R.S. already knows that meals are a much abused tax deduction. That’s one reason why meals are only 50% deductible.

 

4. Fees

Most business owners try to deduct their personal meals as a business expense. However personal meals are not deductible! In order for business meals to be deductible, four pieces of information must be written on each food receipt. The date the meal was purchased, the name and address of the restaurant, the total amount of the meal including tip, and the meal’s business purpose. The business purpose of the meal is the information item usually left out most often. But it is a very important piece of information because it means the difference between a non-deductible personal meal and a deductible business meal. Don’t forget to list the name of the customer you bought the meal for. The easiest way to correctly keep meal receipts is to immediately write any missing required information on the receipt as soon as you get it. Of course the I.R.S. already knows that meals are a much abused tax deduction. That’s one reason why meals are only 50% deductible.

 

5.Depreciation

Depreciation is a great tax saving tool when used correctly. Whenever you use an asset for business, you are allowed to deduct a portion of its purchase price each year of its useful life from your taxes. The amount you save is called depreciation. The I.R.S. keeps a table of business assets and how long they can be depreciated. Depreciation provides yearly tax savings in order for you to replace your asset when it is worn out. There are different ways to depreciate assets, but they all work in this way. Some depreciation schemes pay back more money at the beginning of the asset’s life, others an equal amount each year, etc. For tax purposes, if you sell a depreciated asset you must pay back depreciation already received. 

6. Credit Cards

If you use a personal credit card for business, or just the opposite, use a business card for personal purchases, you must keep good records in order to receive the proper tax deduction. Whenever there is a mixed use credit or debit card, you must “allocate” business expenses. Remember that only business expenses are tax deductible. Allocate means you subtract personal expenses and do not claim them as business expenses. This includes interest on any unpaid balances. If you are claiming credit card unpaid balance business interest, but your unpaid balance includes personal purchases, you must first deduct the personal interest from the business interest.

 

In Conclusion

Because business owners get to deduct the money they must spend to make the money they are taxed on, record keeping is key. Most business owners at some point have received a notice from the I.R.S. where it figured their taxes and came up with a huge bill. The I.R.S. calculates that huge bill based on the income it sees without deductions. It’s up to the business owner to keep up with business deductions and claim them. 

 

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