One powerful tax reduction strategy is to reduce amount of salary taken out of a business, because salary is a very high taxed form of income. Instead we want to try to shift expenses onto your business, in order to reduce the businesses’ net income. There are over 300 tax deductions available to business owners. Many tax professionals focus on a core of 15-20 core tax deductions and can sometimes get into trouble by pushing the envelope too far on those deductions, and need to go wider instead of deeper.
Proper documentation is absolutely essential to audit-proof your records. We want to be sure that these expenses are paid out of your business operating account, your day-to-day business checkbook or corporate credit card. Corporate credit cards allow you to keep accurate records of expenses for travel, meals, etc. and are good for tracking payments. You should try to immediately pay down that credit card to avoid interest expenses and keep the balances low.
There are two ways to calculate the amount you can take for the home office tax deduction. The first method is simply the percentage of the square footage of your home occupied by your home office. Office space must be segregated, preferably a separate room with desk and other office stuff. Your office may also be part of a room, but that part of the room must be used only for activities related to the running of your business.
Sometimes a better way to calculate the amount of the deduction is to go to your local realtor and get printout of local office space and cost per square foot. Multiply by your square footage to get expense and possibly more. For example, if your office occupies 150 square feet of your 1500 sq ft. home, you can deduct 10% of your mortgage payment. Let's say you pay $2,000 per month in mortgage, your home office tax deduction is $200/month. If the average cost of office space in your area is $15 per square foot, then the deductible amount of your home office is $15*150= $2250. This is a tremendous tax savings.Make sure you keep accurate records to be sure none of your deductions draw the attention of IRS auditors.
Telephone and cell phone costs used for business are completely legitimate business expenses. In your home office it is advised to have two lines, one personal and one for business use paid for out of corporate checking account. Separate fax line or high speed internet are legitimate business expenses.
Home office equipment – desk, chair, filing cabinet, computer, supplies are all business deductions, be sure you are paying for all of these out of the business. Cleaning supplies related to keeping the home office in good shape – paper towels, cleaners, 409,
Refrigerator filled with snacks and refreshments for customors and business associates can be business expenses. Stock a shelf in your refrigerator. Do not pay for your groceries from your business account. Put the snacks and cleaning supplies and refreshments on corporate credit card, and pay for them separately.
Any equipment you have your company buy it from you, simply have your company write you a check. That gym occupies space that can be deducted at the rate of your home office, which can help your deduction be even more.
imagine you work for a big company, and around quitting time your boss says “we have a deadline on this project, and I really need you to stay and finish it” and he offers to pay for your supper and order a meal in for you. That money he uses to buy your dinner is a business expense, and a legitimate tax deduction. You can do the same thing if you are working late. And pay for the cost of the meal or reimburse yourself. A good rule of thumb is to use the supper money deduction maybe 3-4 times per month, $25-30 each time is pretty reasonable. Any expenses more than $75 require a receipt.
Dinner by yourself is not deductible, even if you are reading something about business. A married couple cannot claim a business deduction for their meal out, even if they are discussing business. The IRS is looking to catch anyone taking questionable deductions, so don’t try something like this. If a single person or married couple go out for dinner and discuss business, 50% of that meal is deductible.
Entertaining at home – hosting a business meeting or sales presentation. If you discuss business in the context of that gathering, for example a BBQ at your home, the cost of that meal is fully tax deductible. Don’t over do it, but perhaps taking this deduction once a week is good, especially if you can show sales as a direct result of the gathering.
Meetings followed by entertainment – If you and a friend meet and discuss business, then go play around of golf or attend a show, skiing, or anything of the sort– it is completely deductible as long as you document what the meeting was about and keep accurate records.
Office parties or promotional events – holiday party, BBQ whatever. Order food and drinks in as a promotional event invite prospective sales, and the entire cost of the event is deductible.
Your own children, grandchildren, and nieces and nephews. You can hire your kids at age 7, and help them to get them in the habit of documenting their employment and planning for the future.
You can use your children as a spokesperson for a sales pitch or other promotional methods such as flyers or a website and pay them a modeling fee. The amount you can pay them tax free is between 6-7 thousand dollars that they can put in a educational IRA or retirement fund or savings account. Learn more about the child tax deduction
As long as you use a written medical reimbursement plan, your company can pay for healthcare insurance premiums, deductibles, and copays. Even things not covered by medical insurance, such as dental care, eyeglasses, orthodontics, chiropractics, nutritional care, acupuncture, therapeutic massage, or other alternative care that your insurance won’t cover the cost of.
If you get a note from your doctor saying it would be beneficial for you to have access to a swimming pool, sauna, hot tub, you can pay for these items and take the expense as a tax deduction. Your business can pay for your medical care and significantly reduce your out of pocket expenses.
Your business can pay for the expense of your automobile to the extent that you use the vehicle for business use. There are two ways to take the automotive tax deduction – by keeping a log of actual expenses, or a percentage of the use for the business. Your car payment, gas, oil, repairs, tires, maintenance, etc. are all eligible for tax deductions to the extent that you use the car for business purposes. The car need not be registered to business to take the deduction.
You can track every mile you use for business: if you are putting 35-40k miles per year, the per mileage charge around 30cents can be worth it. Keep a mileage log for your records and make sure you keep receipts of any expenses.
Another strategy is to have two different cars, one for business use and one for personal transportation. This will allow you to deduct 100% or the business car. You can also choose to use both cars 70 percent for business and effectively write off 140 percent of your automobile expenses.
Any gift to individuals is limited to $25 per person per gift. If a gift is given to another businesses entire company, there is no limitation on the value of the gift.
Big ticket items can be deducted if they are given as your company’s annual rewards. Your company is allowed to give two gifts each year – one for safety and one for longevity (if your company around for at least 5 years). The award must be given as a gift or gift certificate.
You can deduct the cost of any personal education expenses, lessons anything educational even if it has nothing to do with the business you are currently in. The cost of travel to these seminars is also deductible, including any meals while you travel and lodging if you stay overnight.
Any haircuts or manicures done while on business travel are tax deductions. Also any dry cleaning done within a couple days of travel is deductible, but it must be done in connection with a business trip.
Dependants come in two forms, children and the elderly. You are eligible to deduct $5,250 per year per person with dependant care. You must provide a home for the dependent, and pay over half the costs of maintaining a home for your dependent. You cannot claim childcare or adult daycare expenses for someone who does not live with you.
Strategy implementation is the purpose of our mentoring program on reducing taxes and saving money. There are over 300 tax deductions available to business owners that can save you a tremendous amount of money if you properly implement and document them. Sign up for a free strategy session with the tax professionals at pathfinder business strategies to see how to apply these deductions, and many more, to help reduce your taxable income and turn over less money to the IRS.
To learn more about developing business tax strategies, please see our Small Business Taxes page.