1) Home Office Tax Deduction
This tax deduction allows sole proprietors and single member LLC’s to deduct a percentage of their home office expenses that is used exclusively and regularly for business. The percentage is calculated based upon square feet used for business use. Deductions can include rent, mortgage interest, home improvements, utilities, maintenance, cleaning supplies, and anything else related to the home office.
There is also a simplified home office rule that went into effect in 2013 that allows taxpayers to deduct $5 per square foot up to a maximum of 300 square feet. The simplified home office rule allows taxpayers to deduct the home office expense using just the square feet alone and not the actual home office expenses incurred. The simplified rule still requires taxpayers to use their space exclusively and regularly; however, it does simplify the calculation and record-keeping.
2) Car mileage, interest, and depreciation
Taxpayers can deduct either their actual auto expenses or a standard mileage rate, whichever is higher. The standard mileage rate for 2014 is 56 cents per mile.
Taxpayers will need to record mileage on each trip that is business related. Number of miles driven, business purpose, and odometer readings before and after each trip. This can be onerous, but the problem can be solved with the use of a mileage tracking app like ‘MileTracker’ or from a mileage tracking log that can be purchased from Staples, Office Depot, etc. and left in the glove compartment.
Depreciation on the car that you purchased is also a deduction that can give current and future tax benefits. In order to deduct, you will need the car purchase details such as date purchased, cost, make and model, and whether the car is a owned or leased. If leased, interest paid back on the lease is also tax deductible.
Newspapers, magazine, and music e.g. Spotify, The Wall Street Journal, etc. are common subscriptions we use every day, and, if they are related to your work, they are deductible. Many sole proprietors and small businesses either listen or play music whilst they work. Large corporations pay thousands of dollars a year for elevator/lobby music which they deduct 100%. The same applies to your small business. Many entrepreneurs purchase trade related newspapers, magazines, journals, and online subscriptions. All of these expenses are tax deductible.
4) Distinguishing Meals & Entertainment from Travel
On tax returns, ‘Meals & Entertainment’ is only 50% deductible while Travel is 100% deductible. Many entrepreneurs who started out in the corporate world are familiar with ‘Travel & Entertainment’ (T&E) reports which are usually in the form of credit card statements. When they start their companies, they use this one category to lump all of their travel, meals, and entertainment expenses. When preparing tax returns, many tax preparers may overlook this and apply the 50% deduction to the entire category. I would recommend entrepreneurs keep two different categories: one for ‘Meals & Entertainment’ (50% deductible) and another for ‘Travel’ (100% deductible). This way it is easier to distinguish, and you won’t lose 50% of your Travel deductions, which could amount to significant tax savings.
5) Loan and Credit Card Interest
This is a commonly overlooked tax deduction. Many entrepreneurs fund their early stage startups with credit cards and personally guaranteed loans. The principal paid back on these debts is not deductible, while the business related purchases made using loan and credit cards are deductible. The interest related to the business purchases paid back on these loans is 100% tax deductible.
The monthly minimum payments that are being made by entrepreneurs on their credit cards include the interest that is partially deductible. It is important to analyze these payments at the end of the year to see what is interest and what is not.
6) Prior Year Losses
Do you have losses from a prior year that can offset current year income? Prior year losses can offset current year profits and reduce your tax liability. These losses (Net Operating Losses) in a prior year can be carried forward 20 years or carried back 2 years. Unless you have an experienced accountant that you work with on a regular basis, these losses can be overlooked very easily. It is important to note that these losses can stem from a previous business to offset profits from your current business.
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