Congratulations on your first year in business! Whether you hit your goals or not, now is always the right time to pay the least amount of tax legally owed. Not a single dollar more! Do you hear me universe? Those dollars could pay for another click on your Facebook ad or a nice, hot Starbucks coffee. What those dollars shouldn’t do is end up with Uncle Sam IF there is a legitimate tax deduction that could keep them in your (business) pocket. After all, TurboTax is constantly reminding us, “It doesn’t take a genius to do your taxes.” Be smart and consider these tax deductions before finalizing your return.
1. Using personal assets in your business.
Laptop? Desk? Blue Yeti mic? Don’t miss out on this often overlooked deduction your first year in business. You should determine the fair market value of these assets and officially place them in service in your business. Depending on the individual values you may just expense them as office expenses. Or, you can list them as fixed assets and take the Sec 179 expense deduction to still get the full deduction for their value your first year in business. Keep in mind doing this means they belong to the business now. If you later sell that laptop to your buddy because you are buying a new one, the income from the sale belongs to the business and will be taxable.
2. Not including early expenses.
Many new owners don’t have a hard cut over to being in business. This means some early expenses may not have been paid from your business account but rather a personal account or credit card. What expenses did you have on the way to being official and opening your doors for business? Expenses could include legal and filing fees, travel, and advertising to start your business. Tally up any expenses paid for with personal funds before you officially started your business. You can fully deduct up to $5,000 of start up costs with the rest being amortized. Don’t fall into the trap of thinking you didn’t spend much and don’t want to mess with it. At least spend a few minutes to verify that what you recall as not much, really wasn’t much. Oh, and since you did the checking, let’s just go ahead and take the deduction, shall we? For every dollar of expense found, about a quarter could be saved on your tax bill.
3. Recording money you put in the business as income.
While this isn’t a tax deduction per se, doing this will inflate your tax bill in the same way as a missed tax deduction. We want to avoid that! It may seem like a silly error to make, but if you are not using accounting software and don’t understand bookkeeping this could happen to you. It could also happen if you just turn over a shoebox mess to a tax preparer who doesn’t ask enough questions. The initial cash funds to open accounts (or, later the “my business account balance is getting kinda low” funds) could end up in revenue rather than on the balance sheet as owner contributions where they belong. Review the detail of your revenue to make sure every transaction making up the total is truly sales/revenue and belongs there. Paying taxes on money YOU put into your business is just plain crazy!
4. Tracking mileage.
It may seem petty and small. But, it’s your tax dollars, right? Don’t get me wrong, I’m sure the IRS would have no objections if you overlooked this and just didn’t deduct anything and in turn paid more in taxes. I cry a tiny bit inside whenever I have a client who doesn’t want to bother with mileage. Yes, yes there is the issue of time/effort vs money saved. Which is exactly why you should use this as an excuse to get a new tech toy and app like Automatic. If you used your vehicle in your business, you can take either the actual expenses or the standard mileage rate – NOT both. The standard mileage rate for 2015 was 57.5 cents per mile. For me, it is easy to have weekly business mileage of 100 miles. Take that 100 x 52 weeks x .575 = $2,990 deduction. If you want to deduct actual expenses, you will need to figure the business mileage % by taking the business miles divided by the total miles driven for the year. You can then deduct the business % of your total expenses. “I always keep my gas receipts,” said no one, ever. This alone is a great reason to use the standard deduction. But, while you are putting in the work, you should run the numbers both ways to see which one will most likely give you the best deduction now and in future years. Check out IRS Pub 463 for more information than you probably care to know.
5. Home office.
Don’t be afraid of the home office deduction! Some people still believe this is a red flag for an audit. File an accurate tax return, keep receipts to substantiate your expenses, and there is nothing to be found in an audit. If you meet the requirements for the home office deduction, please take it. It truly is that simple. Don’t feel like digging through your housing and utility bills to come up with your actual expenses? Use the IRS simplified option to still get that deduction without all the digging. A 10×10 sq. ft. office used all year would result in a $500 tax deduction.
It is easy to get overwhelmed your first year…and ever after your first year. You may find out you can live with your tax bill without digging for these deductions. As a tax lady, I never want you to pay more than you should. Never. If you are tempted to pass on these deductions, I would challenge you to pick at lease ONE. Do a bit of digging and get that deduction! Be prepared – saving money can be addicting. So, which deduction will you pick?
Not sure if you started your business off on the right foot? Grab our Checklist for getting control of your business finances.