Learn how you can enhance your business revenue by using business expenses more effectively…
If you are currently a business owner, or desire to be one—it is important that you earn income and you know “the deductions that you can claim” now and in your future.
In this discussion TheWealthIncreaser.com will discuss a number of deductions or business expenses that you can take to help lessen your tax burden.
With this being the creation of the last page of this decade for the creator of TheWealthIncreaser.com and the 100th blog page on this site TheWealthIncreaser.com thought that an appropriate topic of discussion for those who desire to build wealth in the next decade and beyond was to show in clear terms how to use “business expenses” to build your business more efficiently–and effectively.
Although this discussion is longer than most, it is important that you “lock-in” on this discussion and utilize your mind at a high level so that you can see clearly where you can use business expenses to achieve more in the coming years.
Record Keeping
It is important that you realize the importance of record keeping whether it be for travel, meals, entertainment, office in the home, building, warehouse, office out of the home, automobile usage for business, advertising and any other expense related to your business.
It is important that you realize that most expenses—and in some cases all expenses that are directly related to your business—can or have the potential to be deductible on your individual or business tax return—and it is you who must keep records in an acceptable way to meet the scrutiny of the IRS.
All of the business expenses that follow have one thing in common—they all require that you keep effective records so that you can protect your interest if you face IRS scrutiny.
In the following paragraphs we will detail a number of critical expenses and show you ways that they can help you lower your taxable income.
Whether you now have (or are contemplating) forming a business as a sole proprietor, partnership, LLC or corporation–the discussion that follows can help you strategically plan your business and achieve more throughout your lifetime.
Automobile Expenses
You can use actual expenses or mileage to deduct automobile expenses and that topic will be discussed in greater detail later in this discussion.
For now, be aware that the standard mileage rate increased to 58 cents per mile for the 2019 tax year—up from 54.5 cents per mile in 2018.
Always remember that “depreciation” which will be discussed later, is already factored into the 58 cent mileage rate mentioned above.
For 2019, the first-year limit on depreciation, special depreciation allowance, and section 179 deduction for vehicles acquired before September 28, 2017, and placed in service during 2019 is $14,900.
The first-year limit on depreciation, special depreciation allowance, and section 179 deduction for vehicles acquired after September 27, 2017, and placed in service during 2019 is $18,100.
If you elect not to claim a special depreciation allowance for a vehicle placed in service in 2019, the amount is $10,100.
Meals & Entertainment
In general, entertainment expenses are no longer deductible.
The cost of business meals generally remains deductible, subject to the 50% limitation.
The maximum amount you can elect to deduct for most section 179 property (including cars, trucks, and vans) you placed in service in tax years beginning in 2018 and forward is $1,000,000.
This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2,500,000.
For 2018 and 2019, the special (“bonus”) depreciation allowance on qualified property (including cars, trucks, and vans) is 100% for qualified property acquired and placed in service after September 27, 2017 and placed in service before January 2023, and is reduced 20% each year after for property placed in service before January 2027.
For tax purposes, travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.
An ordinary expense is one that is common and accepted in your trade or business.
A necessary expense is one that is helpful and appropriate for your business.
An expense does not have to be required to be considered necessary!
If you are in the military and you are transferred from one permanent duty station to another, you may have deductible moving expenses—for most, moving expenses are no longer deductible.
Generally, your tax home is your regular place of business or post of duty, regardless of where you maintain your family home.
It includes the entire city or general area in which your business or work is located.
If you have more than one regular place of business, your tax home is your main place of business.
If you move around a lot you are considered an itinerant (a transient) and your tax home is wherever you work.
As an itinerant, you cannot claim a travel expense deduction because you are never considered to be traveling away from home.
If you have more than one place of work, consider the following when determining which one is your main place of business or work:
- The total time you ordinarily spend in each place.
- The level of your business activity in each place.
- Whether your income from each place is significant or insignificant.
If you (and your family) do not live at your tax home (defined earlier), you cannot deduct the cost of traveling between your tax home and your family home.
You also cannot deduct the cost of meals and lodging while at your tax home.
If you are on a temporary assignments or job there are nuances to your tax treatment that may require additional analysis by your tax professional.
Note: there are exceptions for federal crime investigators or prosecutors
When you travel away from home on business, you should keep records of all the expenses you have and any advances that you receive from your employer.
You can use a log, diary, notebook, or any other written record to keep track of your expenses.
The types of expenses you need to record, along with supporting documentation include meals:
There is a 50% limit on meals.
You can figure your meals expense using either of the following two methods:
1) Actual cost
2) The standard meal allowance
Both of these methods are explained below.
But, regardless of the method you use, you generally can deduct only 50% of the unreimbursed cost of your meals.
The actual cost method is quite simple and it only requires that you keep records of your meal costs and divide the cost by 50 percent. You now have your meal deduction using the actual cost method.
If you use the standard meal allowance, you still must keep records to prove the time, place, and business purpose of your travel. You deduct a per-diem amount based on IRS guidelines.
For travel between October 1, 2018 and September 30, 2019, the rate for most localities in the United States is $60 a day.
Note: The rates for the remainder of 2019 had not been published as of the date of this article
You can find this information (organized by state) at gsa.gov/perdiem.
Enter a zip code or select a city and state for the per diem rates for the current fiscal year.
Per diem rates for prior fiscal years are available by using the drop-down menu.
Incidental-expenses-only method
You can use an optional method (instead of actual cost) for deducting incidental expenses only.
The amount of the deduction is $5 a day.
You can use this method only if you did not pay or incur any meal expenses.
You cannot use this method on any day that you use the standard meal allowance.
This method is subject to the proration rules for partial days.
Building Mortgage or Lease Payments
If you are purchasing or renting a building for business use you can deduct the mortgage or lease payments.
Insurance, taxes and other fees related to the use and upkeep of the property such as maintenance, lawn care, grounds and other fees are also deductible.
Business Gifts
Always realize that there is a $25 limit on gifts as far as deductibility is concerned.
You can deduct no more than $25 for business gifts that you give directly or indirectly to any one person during your tax year.
Transportation Expenses
These expenses include the cost of transportation by air, rail, bus, taxi, etc., and the cost of driving and maintaining your car.
Also, daily transportation expenses can be deducted if:
(1) you have one or more regular work locations away from your residence, or
(2) your residence is your principal place of business and you incur expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance.
If you want to use the “standard mileage rate” for a car you own, you must choose to use it in the first year the car is available for use in your business.
“Then in later years, you can choose to use either the standard mileage rate or actual expenses.”
If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.
If you purchase a car and change to the actual expenses method in a later year, but before your car is fully depreciated, you have to estimate the remaining useful life of the car and use straight line depreciation.
Standard mileage rate not allowed
You cannot use the standard mileage rate if you:
1) use five or more cars at the same time (such as in fleet operations)
2) claimed a depreciation deduction for the car using any method other than straight line, for example, MACRS (as discussed later under Methods of depreciation under Depreciation Deduction)
3) claimed a section 179 deduction (discussed later) on the car
4) claimed the special depreciation allowance on the car, or
5) claimed actual car expenses after 1997 for a car you leased.
If you are self-employed and use your car in your business, you can deduct the business part of state and local personal property taxes on motor vehicles on Schedule C, Schedule C-EZ, or Schedule F (Form 1040).
If you itemize your deductions, you can include the remainder of your state and local personal property taxes on the car on Schedule A (Form 1040).
In addition to using the standard mileage rate, you can deduct any business related parking fees and tolls.
Parking fees that you pay to park your car at your place of work are nondeductible commuting expenses!
NOTE: If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.
Actual car expenses include:
Depreciation
Tolls/Parking fees
Licenses
Lease payments
Registration fees
Gas
Insurance
Repairs
Oil
Garage rent
Tires
If you have “fully depreciated” a car that you still use in your business, you can continue to claim your other actual car expenses.
Be sure you continue to keep records!
If you use your car for both business and personal purposes, you must divide your expenses between business and personal use.
You can divide your expense based on the miles driven for each purpose—that is why effective record keeping is so important.
If you use a vehicle provided by your employer for business purposes, you can deduct your actual unreimbursed car expenses.
Casualty and theft losses
If your car is damaged, destroyed, or stolen—you may be able to deduct part of the loss that is not covered by insurance.
Note: For tax years 2018 through 2025, if you are an individual, casualty and theft losses of personal-use property are deductible only if the losses are attributable to a federally declared disaster, however business casualty and theft losses are still deductible.
You can elect to recover all or part of the cost of a car that is qualifying section 179 property, up to a limit, by deducting it in the year you place the property in service.
What is the section 179 deduction?
A section 179 write off allows you to write off part or the entire purchase price of an asset in one year as opposed to depreciating and writing it off over a number of years based on its asset class and depreciation schedule.
Therefore if your goal is to reduce your taxable income you may want to write it off in one year. Likewise if you desire to spread out the deduction over a number of years you have that option as well.
You must normally make the 179 election in a timely manner in order for it to be allowed by the IRS.
If you elect the section 179 deduction, you must reduce your depreciable basis in the car by the amount of the section 179 deduction.
“You can claim the section 179 deduction only in the year you place the car in service.”
For this purpose, a car is placed in service when it is ready and available for a specifically assigned use in a trade or business.
Even if you are not using the property, it is in service when it is ready and available for its specifically assigned use.
A car first used for personal purposes cannot qualify for the 179 deduction in a later year when its use changes to business.
Let’s say in 2018 you bought a new porsche and placed it in service for personal purposes.
In 2019, you began to use it for business.
Changing its use to business use does not qualify the cost of your car for a section 179 deduction in 2019.
“However, you can claim a depreciation deduction for the business use of the car starting in 2019.”
Requirements for 179 deduction
More than 50% business use is a requirement.
You must use the property more than 50% for business to claim any section 179 deduction.
If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use.
The result is the cost of the property that can qualify for the section 179 deduction.
If the cost of your qualifying section 179 property placed in service in 2019 is over $2,500,000, you must reduce the $1,000,000 dollar limit (but not below zero) by the amount of cost over $2,500,000.
Let’s say the cost of your section 179 property placed in service during 2019 is $3,500,000 or more, you cannot take a section 179 deduction.
The total amount you can deduct under section 179 each year after you apply the limits listed above cannot be more than the taxable income from the active conduct of any trade or business during the year.
If you are married and file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service.
If you or your spouse file separate returns, you are treated as one taxpayer for the dollar limit. You must allocate the dollar limit (after any reduction) between you and your spouse.
Employees use Form 2106 to make the election and report the section 179 deduction.
All others use Form 4562 to make an election.
You must keep records that show the specific identification of each piece of qualifying section 179 property.
These records must show how you acquired the property, the person or business you acquired the property from, and when you placed the property in service.
Note: Daycare centers, travel by air, cruise ships and rental income have a special set of rules as it relates to deductions.
You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement.
You must generally prepare a written record for it to be considered adequate.
This is because written evidence is more reliable than oral evidence alone!
However, if you prepare a record on a computer, it is considered an adequate record.
Be sure to record the Cost—Date—and Purpose—especially on Gifts, Travel and Transportation.
If you do so in written form that is acceptable. Also, if done on your computer that is usually ok as well!
You should keep the proof you need in an account book, diary, log, statement of expense, trip sheets, or similar record.
You should also keep documentary evidence that, together with your record, will support each element of an expense.
Documentary evidence
You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.
Exception:
Documentary evidence is not needed if any of the following conditions apply:
• You have meals or lodging expenses while traveling away from home for which you account to your employer under an accountable plan, and you use a per diem allowance method that includes meals and/or lodging.
- Your expense, other than lodging, is less than $75.
- You have a transportation expense for which a receipt is not readily available.
Adequate evidence
Documentary evidence ordinarily will be considered adequate if it shows the:
-amount,
-date,
-place, and
-essential character of the expense
For example, a stay at an Air BnB where you get a receipt is enough to support expenses for business travel if it has all of the following information.
- The name and location of the Air BnB.
- The dates you stayed there.
- Separate amounts for charges such as lodging, meals, and telephone calls.
A restaurant receipt is enough to prove an expense for a business meal if it has all of the following information.
- The name and location of the restaurant.
- The number of people served.
- The date and amount of the expense.
If a charge is made for items other than food and beverages, the receipt must show that this is the case.
Canceled check
A canceled check, together with a bill from the payee, ordinarily establishes the cost.
However, a canceled check by itself does not prove a business expense without other evidence to show that it was for a business purpose.
Timely-kept records
You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence.
A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall.
You do not need to write down the elements of every expense on the day of the expense.
“If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely kept record.”
If you give your employer, client, or customer an expense account statement, it can also be considered a timely kept record.
This is true if you copy it from your account book, diary, log, statement of expense, trip sheets, or similar record.
Proving business purpose
You must generally provide a written statement of the business purpose of an expense.
However, the degree of proof varies according to the circumstances in each case.
If the business purpose of an expense is clear from the surrounding circumstances, then you do not need to give a written explanation.
What if you have incomplete records?
If you do not have complete records to prove an element of an expense, then you must prove the element with:
- Your own written or oral statement containing specific information about the element, and
- Other supporting evidence that is sufficient to establish the element.
If the element is the description of a gift, or the cost, time, place, or date of an expense, the supporting evidence must be either direct evidence or documentary evidence.
Direct evidence can be written statements, or the oral testimony of your guests or other witnesses setting forth detailed information about the element.
Documentary evidence can be receipts, paid bills, or similar evidence.
If the element is either the business relationship of your guests or the business purpose of the amount spent, the supporting evidence can be circumstantial, rather than direct.
For example, the nature of your work, such as making deliveries, provides circumstantial evidence of the use of your car for business purposes.
Invoices of deliveries establish when you used the car for business.
Sampling
Another record keeping strategy that many are unaware of but could prove helpful is the use of sampling.
You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year.
You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.
Separating expenses
Each separate payment is generally considered a separate expense.
For example, if you entertain a customer or client at dinner and then go to a show on broadway, the dinner expense and the cost of the broadway tickets are two separate expenses.
You must record them separately in your records.
Combining items
You can make one daily entry in your record for reasonable categories of expenses.
Examples are taxi fares, telephone calls, or other incidental travel costs.
Meals should be in a separate category.
You can include tips for meal-related services with the costs of the meals.
Expenses of a similar nature occurring during the course of a single event are considered a single expense.
Car expenses
You can account for several uses of your car that can be considered part of a single use, such as a round trip or uninterrupted business use, with a single record.
Minimal personal use, such as a stop for lunch on the way between two business stops, is not an interruption of business use.
Allocating total cost of travel or entertainment
If you can prove the total cost of travel or entertainment but you cannot prove how much it cost for each person who participated in the event, you may have to allocate the total cost among you and your guests on a pro-rata basis.
To do so, you must establish the number of persons who participated in the event.
If your return is examined, you may have to provide additional information to the IRS.
This information could be needed to clarify or to establish the accuracy or reliability of information contained in your records, statements, testimony, or documentary evidence before a deduction is allowed.
How long should you keep records and receipts?
You must keep records as long as they may be needed for the administration of any provision of the Internal Revenue Code.
Generally, this means you must keep records that support your deduction (or an item of income) for 3 years from the date you file your income tax return on which the deduction is claimed.
A return filed early is considered filed on the due date.
There are certain nuances and rules for independent contractors and clients, fee-basis officials, certain performing artists, Armed Forces reservists, and certain disabled employees–so if you fall in one or more of those categories be sure to consult your tax professional for more up to date information.
You report your gift expenses and transportation expenses, other than car expenses, on line 27a, and you report your car expenses on line 9 of schedule C if you file as a sole proprietor.
You would also complete Part IV of the form unless you have to file Form 4562 for depreciation or amortization.
Employee Business Expenses no longer deductible
If you are an employee and your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2.
The three simple guidelines an Accountable Plan must follow to be considered valid are:
1) all expenses to be reimbursed through the plan must have a business connection,
2) expenses must be “timely substantiated,” and
3) any excess advances provided to the employee must be “timely repaid.”
“Employee” expenses for business use of the home are no longer allowed.
If you are an employee, you can no longer claim any miscellaneous itemized deductions on Schedule A, including expenses for using your home as an employee.
Miscellaneous itemized deductions are those deductions that would have been subject to the 2% of adjusted gross income limitation had they not been eliminated for most with the 2017 Tax and Jobs Act.
You cannot claim a deduction for mortgage insurance premiums for expenses paid or accrued after 2017 if you have a home office.
Home Office Deduction
You can use two methods to claim the home office deduction:
When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method.
- Square Foot Approach, or
- Simplified method for business use of home deduction.
Actual Expenses (Square Foot Approach)
You simply divide your business usage area by the square foot area of your house to come up with the business percentage.
All expenses associated with your home office and home would be multiplied by the percentage in order to come up with your business deduction.
To qualify to deduct expenses for business use of your home, you must use part of your home:
- Exclusively and regularly as your principal place of business (defined later),
- Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
- In the case of a separate structure which is not attached to your home, in connection with your trade or business,
- On a regular basis for certain storage use (see Storage of inventory or product samples, later),
- For rental use, or
- As a daycare facility (see Daycare Facility, later).
“You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business.
The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers.”
After you determine that you meet the tests under Qualifying for a Deduction, you can begin to figure how much you can deduct.
Simplified Method
The IRS provides a simplified method to figure your expenses for business use of your home.
Electing to use the simplified method.
The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses.
“You choose whether or not to figure your deduction using the simplified method each tax year.”
With the simplified method you receive a standard deduction of $5 per square foot, up to 300 square feet (the deduction can’t exceed $1,500).
$5 multiplied by 300 square feet equals $1,500 is your maximum deduction!
Qualified Business Income
Although not a direct expense QBI or qualified business income—may help you lower your taxes and can be quite helpful to those who qualify.
QBI: If your business is a specified service, trade or business and operates as a sole proprietor, partnership, LLC member or S corporation stockholder—you could possibly qualify for the QBI deduction or pass-through deduction (if otherwise eligible) provided you have taxable income below certain amounts.
Conclusion
By landing on this page you have learned about business expenses in great detail.
For those individuals or companies that are new to business or existing companies or individuals who want to maximize their deductions—you can now do so by planning effectively.
The most common fully deductible business expenses in alphabetical order include the following:
- Accounting fees
- Advertising
- Bank charges
- Commissions and sales expenses
- Consultation expenses
- Continuing professional education expenses
- Contract labor costs
- Credit and collection fees
- Delivery charges
- Dues and subscriptions
- Employee benefit programs
- Equipment rentals
- Factory expenses
- Insurance
- Interest paid
- Internet subscriptions, domain names, and hosting
- Laundry
- Legal fees
- Licenses
- Maintenance and repairs
- Office expenses and supplies
- Pension and profit-sharing plans
- Postage
- Printing and copying expenses
- Professional development and training fees
- Professional fees
- Promotion
- Rent/Lease payments
- Salaries, wages, and other compensation
- Security
- Small tools and equipment
- Software
- Supplies
- Telephone
- Trade discounts
- Travel
- Utilities
- Web Services
By utilizing the above expenses to offset against your income for the year you can use the above expenses to strategically increase or decrease your tax position as it relates to your payment of business taxes. Keep in mind most of the expenses covered in this discussion apply to sole proprietors, LLC’s, LLP’s, partnerships, S corporations and C corporations.
Whether you are a sole proprietor, LLC, partnership or corporation—you can manage your tax position so that you can achieve the goals that you desire as far as your business and personal growth are concerned.
If your goal is to get in position to use credit in your future—you may want to maximize your income and minimize your expenses to get the loan that you need at an appropriate rate and terms.
By doing so you can possibly put yourself in stronger position in the eyes of financial institutions when you apply for credit or a particular type of loan that will look at your “businesses financials” and/or “personal financials” to determine if you or your company meet the lending criteria that they require.
If you anticipate no need to use credit in the short or intermediate time period you may want to maximize your expenses and lower your tax payments.
If your goals fall in the middle you can plan accordingly as well.
All the best toward minimizing or maximizing your expenses and improving your circumstances as we enter 2020 and beyond.
Success lives in you—now is the time that you make your dreams come true…
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