Know Your Deductible Expenses
The most frequently asked question from my bookkeeping clients is, “Are these business expenses, and are they deductible expenses?”
All too often, the answer is no, which creates even more confusion when doing your taxes. We want to bring some clarity to this topic and make sure you’re not missing important deductions.
How to Prove Your Deductible Expenses
It is your bookkeeper’s job to keep you out of trouble with tax authorities by providing good, clear documentation. Help your bookkeeper help you by keeping your receipts and records in good shape.
It can be a pain to deal with all the paper that comes with taxes and getting them filed. Having a plan for how you will deal with paperwork will take you a long way to taming this monster.
- If you keep paper files – Keep a file for every month of the year. Be sure to put notes on receipts about what the expense is for or who you were with. This way you can simply hand the file to your bookkeeper, and they have everything they need.
- If you keep electronic files – The IRS will accept scanned receipts as proof of the expense. They will not take an account statement, so organize those receipts.
- Scan physical receipts or give your bookkeeper the paper files for scanning and provide a place for those electronic files can be stored.
- Have Vendors email receipts to you for filing with your expense files.
- Be sure to use your business credit or debit card for business transactions so they are easily trackable to your business accounts. Try to keep everything in one place so records are easy to find.
Is it a deductible expense?
Once you have all your records organized, it’s important to know which are tax-deductible expenses and which aren’t. Here are some frequently overlooked tax deductions we see clients missing out on.
Subscriptions – In this digital world, many expenses come under the category of subscriptions. Such apps as cloud storage, productivity programs, management tools, and cloud software for your business add up over a year. Even if these are small amounts, do not forget to include them as they are all deductible expenses for your business.
Phone expenses – 2020 has been a year of working at home. Phone expenses are easy to track if you only have a cell phone. If you use a landline in a home office, you will need to determine the percentage of time used for business and the percentage used for personal calls. The business percentage will be deductible expenses. Do not forget to include your Internet expenses. A home office can chew up time on your bill, and you will want to make sure these transactions are included for a deduction. Be sure to give your accountant the total amount of your phone bills for the year.
Digital purchases – Most businesses can record the purchase of stock photos for use on websites, report or graph templates, and downloaded fonts. These are just a few examples of useful digital items. Again, these might be small amounts or large transactions. Either way, be sure they get included in your deductible expenses. This is where a consistent purchase process using a company card will help. All your expenses will be in one place and easy to find.
Electronic payment fees – The convenience of digital purchases or payments is everywhere. If you choose to accept payment services like PayPal, card processing services, or Square, they want their cut too. Be sure to include the fee transactions when making entries in your accounting process.
For example, let’s say you have charged a client $500.00 for January and run the transaction through Square for payment. There are two parts to the deposit of this transaction, the payment, and the Square fee. In your accounting software, you will receive a payment of $500.00. When you create the deposit, it will equal the amount of your fee less the Square fee. Charge = 500.00 Square Fee (2.9%) = 14.50 You would record the income as $500.00 and then create an expense for $14.50 to show the amount Square took for their fees.
Vehicle Expenses – Always discuss your tax position with your CPA before you put a vehicle plan in play. It might be more advantageous for your company to own the vehicle. When you own the vehicle, be sure to track your mileage so you can separate business miles from personal miles.
There are two ways to calculate mileage for the deduction, standard mileage or actual cost mileage. Once you and your CPA determine which process is most beneficial, be consistent about tracking your miles.
- Standard Mileage – Keep track of your mileage and multiply your miles times the Federal standard mileage reimbursement rate. For 2020 that rate is 57.5 cents per mile.
- Actual Mileage – Track the mileage you drive overall and how many of those miles are business. This plus the other vehicle expenses such as fuel, service, insurance, etc., will appear on your tax forms as a percentage of vehicle use.
Tracking your annual mileage does not need to be onerous. There are several mileage tracking apps such as Mile IQ, Triplog, or Stride that make it very easy. Once you chose an app download it to your phone, and it will do the work for you.
Continuing Education – Continuing to improve your skills and keep up on new processes is energizing and important to keep your business relevant. Expenses that relate to education in your current occupation are deductible expenses, so hang on to your course descriptions and/or syllabus to prove the classes are work-related. Online classes, attending conferences, or hiring a coach/mastermind group are just a few of the ways you can keep sharp. Registration fees and materials to take classes are deductible business expenses.
Keep good records of your deductible expenses
Documentation is your best friend when it comes to making business tax deductions count. Be sure to save, organize, and make notes on your documentation so that each year you can be prepared to get your taxes done with ease.
Tax regulations are an ever-changing event. I have discussed a few of the most frequently overlooked deductible expenses. For more information, check the IRS website: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses or book an appointment with your bookkeeping professional to be sure you’re saving the most you can on your business taxes.