It’s that time of year again: tax time. As an entrepreneur, it goes without saying that one doesn’t necessarily feel very charitable on April 15. Paying taxes is a part of life, though. And if you do the proper due diligence, you could lessen your tax liability.
Below is a list of some deductions for entrepreneurs and small businesses you should be sure to take advantage of as tax day approaches . Please review this list carefully and consult a CPA or lawyer for more information (my little disclaimer).
The Internal Revenue Service (IRS) allows you to deduct a portion of your home for business purposes. There are two standards they ask you to meet in order to qualify for this deduction: (1) regular and exclusive use and (2) principal place of business.
Regular and exclusive use means that you “must regularly use part of your home exclusively for conducting business. For example, if you use an extra bedroom to run your online business, you can take a home office deduction for the extra bedroom.”
Secondly, you must be able to show that you use your residence as your principal place of business. As always, there are exceptions and variations to this rule.
Interestingly enough, Investopedia points out that you should not “forget to include your restroom, as the government expects your home company to need facilities too.” They include some more tidbits as well that you should read closely, including mapping out your home office location and taking exact measurements of the space.
Meals and Entertainment
Before anything else, you need to understand that if you take this deduction, you MUST keep your receipts. This deduction is highly audit-prone. However, when handled properly it can certainly help your tax liability.
Investopedia says, “you must conduct business with the person you are entertaining during the meal/event or immediately before or after it. Unlike other deductions, these expenses are only 50% deductible, not 100%.
By that logic, if Matt or Jared were to buy a lucky Under30CEO member a drink at a Meetup event, he would technically be able to write that off as a business expense. After all, getting to know entrepreneurs and their businesses is a vital part of Under30’s business. This concept applies to things like dinners, baseball games, and even golf outings.
(Tip: Once again, keep those receipts).
Cost of Goods Sold
As Gaebler.com points out, as “a small business owner, you’re entitled to tax deductions related to the cost of doing business.”
If you recall from your accounting class, Cost of Goods Sold = Beginning Merchandise Inventory + Net Purchases of Merchandise – Ending Merchandise Inventory. From there, you deduct Cost of Goods Sold “from your gross receipts to figure your gross profit for the year” per the IRS.
(Tip: Pay close attention to what the IRS says about this deduction, particularly capitalization of direct and indirect costs).
Business Use of Your Car
The IRS is pretty clear on this one. If you use your personal car for local business meetings and engagements, you can deduct the mileage used for business based on the standard mileage rate.
(Tip: Make sure you refer to the following IRS links for more information: (1) Publication 463, Travel, Entertainment, Gift, and Car Expenses and (2) Standard Mileage Rates).
If you travel somewhere outside of your immediate geographic location, maybe to an Under30CEO Meetup in New York City, you may be eligible for a deduction. As Investopedia explains, in order for your travel to be “considered a business trip, your trip should have a specific business purpose planned before you leave home, and you must actually engage in some business activity – such as finding new customers, meeting with clients, or learning new skills directly related to your business – while you are on the road.”
Similar to the Meals and Entertainment deduction, please remember to keep copious notes and save your receipts. However, unlike Meals and Entertainment expenses, which are only 50% deductible, Travel expenses are 100% deductible (excluding Meals and Entertainment, of course).
Other Deductions To Keep In Mind
– Education and Travel
– Interest on Business Loans and Business Credit Card Interest
From the Amateur Financier (specifically for Internet entrepreneurs):
– Advertising expenses
– State sales taxes
– Out-of-pocket charitable donations
– Student loan interest paid by your parents
– Software expenses
If you need some help, SOHO Today has a great list of resources to help aid you in your tax preparation and filing. If you have already filed this year, save the link to your “Favorites” and keep it in mind for next year.
Tax time does not have to be a headache for the entrepreneur or small business owner. A little preparation throughout the year and some advice from an accountant or lawyer could go a long way into helping you save some money.
David T. Domzalski is the founder of The Financial Bin, a website dedicated to helping Main Street get a better grasp of the financial world.