There is a fine line between a small business cheating themselves on their taxes and the IRS. One is a misjudgment in claiming legal deductions while the other is a compliance issue that could result in an audit. Even small businesses must maintain a level of compliance regarding their taxes and, even when making good faith deductions and filing taxes; an audit can still occur.
The underlying questions remain, what are allowable deductions for businesses under the federal tax code? Here are three examples of deductions and ways to help ensuring your small business is compliant.
1. A home office deduction
If a small business can make measurements and work out a math problem involving fractions, then there are no complications to this deductions. The primary concern with this claim, though, is computer usage and space designation.
A reminder to small business owners is that the IRS has knowledge of how many home office owners are operating out of their home with young children and likely do not have one room to dedicate to an office. Owners can solve this problem by measuring the area of the home they do use, and claiming that percentage.
Expenses related to the home office include electricity, insurance, mortgage, rent, and so on. It’s important for owners to retain receipts for office supply purchases because those are a deduction, as well.
2. Small business mileage
The IRS wants to give small businesses money back when the drive for the purpose of their business, but they want meticulous records. The recommendation is for owners to keep notebooks in their vehicles to mark the date, mileage, parking costs, tolls, and trip purpose.
When tax time rolls around, small businesses can claim actual mileage or the usage as their deduction. For those who are leasing a vehicle, the inclusion of those payments can be made. For those who are making payments on a vehicle purchase, they can factor the interest payments on their loan and their vehicle’s depreciation.
3. Health insurance
It’s no mystery health insurance costs are in everyone’s minds, particularly the high costs many small business owners face. The good news is those self-employed small business owners paying health insurance premiums can claim 100% as a deduction.
There are limits to this deduction, and it is mainly for proprietorships. For example, if the deduction is more than the business’ net profit, it is not an allowable claim. It is also not an allowable claim if the owner could obtain health insurance coverage from their spouse.
A final warning about audits: they don’t go away
For small businesses that took all the right steps during tax season and still experienced an audit, it’s important to seek the advice of an experienced attorney immediately. Not only will they answer your questions, but they will help point you in the right direction. Ignoring or putting off dealing with a tax-related issue is never the best course of action.
Source: Bankrate, “A dozen deductions for your small business,” Dana Dratch, Accessed March 5, 2016