Tax season is officially upon us.
For many entrepreneurs, that can be a critical time to maximize deductions to help offset business expenses.
But just like anything else, not all deductions are created equal and entrepreneurs often mistakenly think they’re entitled to more than they actually are, say experts.
“Business owners may assume that whatever they spend on business is deductible and that’s not necessarily so,” says Barbara Weltman, a Vero Beach, Florida-based small business tax specialist and author of "J.K. Lasser’s Small Business Taxes 2020" (Wiley; $22.95).
Each tax season, there are some key biz deductions that are commonly misunderstood. Here are some top ones:
Startup Costs: Only certain startup expenses are deductible. These include investigation costs (ie. doing market research, finding office space, etc.), says Weltman. In addition, you can deduct organizational costs related to creating a business entity like a partnership or LLC, she says. Once you identify which costs are startup and which are organizational, the most you can deduct the first year the business is operational is $5,000 for each of those categories. If startup costs exceed $50,000, the deduction is reduced dollar for dollar, she says. So for example, if you have $53,000 in expenses, you could only deduct $2,000 in the first year ($5,000 minus $3,000). If expenses are $55,000 or more, the deduction is eliminated and expenses are amortized over 15 years, says Weltman.
Fringe Benefits: To stay competitive employers may offer employees perks/fringe benefits, but not all are deductible, says Weltman. For example, transportation benefits for commuters such as free/subsidized parking and transit passes are tax-free to the employee, but nondeductible for the employer, she says. Due to the Tax Cuts and Jobs Act (TCJA) of 2017, effective 2018, employer-provided meals for employees at your business premise (ie., in-house cafeteria/break room) are only 50% deductible (previously 100%), says Weltman. But company socials such as holiday parties or picnics are still 100% deductible, says Lawrence Lucarelli, a partner at AVZ & Co., P.C., a Hauppauge-based CPA firm.
Entertainment Costs: Under the TCJA, entertainment-related expenses, excluding meals, are no longer deductible (previously they were 50% deductible), says Nichole Heid, an accountant at Rosedale & Drapala CPAs in Wantagh. This includes taking a client to a show, athletic event, etc. she says.
Meals: Business meals are still 50% deductible, but there must be a legitimate business purpose for the meal and a prospect/client must be present, says Heid. It also has to be deemed not lavish or extravagant, she says, noting, that’s not based on a dollar amount, but on the individual circumstances.
Gifts: Deductions for business gifts are limited to $25 per person annually, she says. Promotional items with the business logo costing $4 and under aren’t included in that $25 limit, says Heid.
Commuting Expenses: Some business owners mistakenly think commuting costs from their home to the office are deductible, says Lucarelli. But that isn’t the case. You can deduct certain auto/mileage expenses related to business use of your automobile (ie., client visits), but there are caveats there too, he says. For example, if you work remotely without a designated office, your visit to your first client would be considered commuting and nondeductible and the same goes for traveling from your last client to your home at the end of the day, he says. So if uncertain, check with a tax professional.
Clothing: Often business owners think they can write off their clothing and/or dry cleaning expenses, says Lucarelli. “The only time you can expense anything to do with clothing is if it’s a uniform,” he says. “A suit wouldn’t be considered a uniform.”
Country Club Dues: Country club dues aren’t deductible, says Mindy Kamen, a partner at Janover LLC, a Garden City-based CPA firm. If you treat a client to a meal at a country club with a legitimate business purpose, you could get a 50% deduction on the meal only, she says.
Fines and Penalties: Fines and penalties — even late tax filing penalties — aren’t deductible, she says.
Home Office: Home office deductions can only be claimed if the space used for your home office is exclusively and regularly used for business, says Kamen. A room that also has a bed in it or working at your kitchen table won’t fly as a home office. But if you have dedicated space, the deduction’s based on the square footage of the office, not your home. So if you have a 1,000-square-foot house and the office space is 100-square-feet you can only take a 10% deduction of the expenses (ie., utilities, mortgage interest, etc.), says Kamen.
Percentage of small business owners who say taxes are a concern
Percentage of small business owners who say health care policy is a concern