Whether you’re still working on this year’s taxes or you’ve efficiently filed already, you’ll want to read through this list to be sure you track every expense that may be eligible as a deduction on next year’s taxes.
Small business owners wear many hats, including that of bookkeeper. If you operate a small business or are considering starting one you’ll need to understand basic bookkeeping. As the bookkeeper, one of your main responsibilities is tracking income and expenses so these numbers can be used to prepare your tax return at year-end. Doing so accurately, will save you time and possibly money at year-end.
Luckily, preparing your business taxes can be made easier with a little preparation and upkeep throughout the year. Depending on the size of your business and the number of transactions you need to record, you may choose to use a business software like QuickBooks or simply a detailed spreadsheet. I’ve used both methods and both are very easy to learn.
So exactly what do you need to track?
The short answer is all income and business-related expenses by category (i.e. cost of goods, advertising, office supplies, legal fees, travel, etc.).
If you’re looking for more detail on exactly what falls under the category of “business expense”, continue reading…
According to the IRS, “Business expenses are the cost of carrying on a trade or business.” The IRS allows businesses to deduct certain expenses if the business is in operation to make a profit. An expense must be both ordinary (common and accepted in your business) and necessary (helpful and appropriate for your business).
Following are some typical business expenses incurred by small businesses that are deductible. This list is intended to provide a guideline as to which expense to record throughout the year in order to make year-end tax time easier.
Record all equipment purchases such as computers, printers, software, and vehicles directly related to the operation of your business. These expenses are deductible up to a certain amount. Depending on the particular item, the full purchase amount may be claimed in a single year, or the IRS may require the it be recorded as a capital expense.
If you operate the business out of part of your home, you may be able to deduct related expenses for business use in your home. These may include mortgage interest, utilities, home insurance, home repairs, and depreciation.
Your business office should be a distinct area within your home and used only for the purpose of running your business. If you have a study that’s also the kids’ study area or a storage area for personal files, then the room is not considered a separate office; likewise, if you have a desk in a spare bedroom. In these cases you cannot claim the entire room as your business office; but instead only the area of that room being used for business purposes.
To determine the percentage of home expenses that is deductible, simply measure the actual work area and divide by the square footage of our home. As an example, if your dedicated work space is 10’x9’ (90 square feet) and your total home is 3,000 square feet, then you may deduct 3% of your home mortgage interest, utilities, and insurance. Using this example, 3% of home repairs which affect the business are also deductible; unless they are directly related to the 10’x9’ work area – in this case you may claim the full expense at 100%.
Payroll & Contract Labor
The money you pay to your employees or independent contractors for work they’ve performed for your business is considered a deductible expense.
Rent or Lease
If you rent or lease a property from which to run your business, that amount is considered a deductible business expense. However, the IRS states that “If you currently have or will receive equity in or title to the property, the rent is not deductible.”
If you borrowed money to operate your business, then the interest you’re paying on that loan is a deductible business expense.
If you use your car for business purposes, then expenses associated with that car are considered deductible expenses. Record all car purchase, loan or lease payments, repairs, car insurance, excise tax, registration, tickets, tolls, and total mileage. If the car was used for both personal and business purposes, keep track of the mileage driven specifically for business and at year-end, the auto-related expenses will be determined as a percentage of the total mileage.
Travel expenses such as airfare, hotel, auto rental, conference fees, laundry, and mileage that are directly related to your business and incurred while traveling are tax deductible. Food for yourself or a client meal is deductible only at 50%.
In addition to home and car insurances, liability insurance carried by a business is considered a deductible business expense if it’s for your trade, business, or profession.
Federal, state, local, and foreign taxes directly related to your business are considered deductible expenses.
Retirement plans where you set aside money for your own and your employee’s retirement are considered a deductible business expense.
Subscriptions to newspapers, magazines, and websites which are directly related to your business and keep you up-to-date on your industry are considered deductible business expenses.
Every business varies so this list may not be all-inclusive. However, as you can see, if an expense is directly-related to the operation of your business, then it is most likely considered deductible and you should keep a record of it. If you are unsure if an expense is considered a deductible business expense, keep the receipt, clearly mark its purpose (as all receipts should be labeled), and review with your accountant.
Knowing which expenses to track and which receipts to save throughout the year, will save you time and money at year-end tax time. For additional information and confirmation, visit www.IRS.gov.
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