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Tax Day: 5 Expenses You Need to Think Twice About

It’s the new year, and the antiholiday is coming. Somehow, Tax Day has emerged as a kind of sardonic cultural celebration, complete with discounts and free food everywhere you look. Whether you’re looking forward to it or dreading it, if you’ve started or are growing a business, you should already be preparing.

Everyone knows about business expenses and the positive impact they imply when concerning your taxes. You know to save your business receipts so you can write them off, but you might not know which receipts you’re allowed to write off, or what steps you need to take to ensure your safety if you’re ever—dare I utter the phrase?—audited by the IRS, and have the validity of these expenses reviewed. The thought of being audited is unpleasant, to say the least, and no restaurant is ever going to give you free food for an Audit Day, but you need to handle your business expenses as though being audited is a certainty. That way, if it ever happens, you’ll have taken the proper steps to cover yourself.

The Lunch Meeting

Have you ever been eating with a business owner or your own boss when he or she offered to pay with the usual remark, “I’ll write it off as a business expense”? This happens alarmingly often—some business owners assume that any stretch of the term “lunch meeting” is acceptable to write off. You need to be careful here. Just because you’re eating with someone else who works for your business doesn’t mean it’s a business expense. If you want an auditor to accept that the sushi you got with Ralph in Accounting was a Bonafide Business Expense (BBE)*, you need to have notes outlining what you talked about while eating those spicy tuna rolls. Having a record will show an auditor that you were actually discussing business with an agenda.

The Home Office

We know entrepreneurs, and we know most of you are working from home at least some of the time, if not all of it. It is possible to deduct office space in your home, but you must meet certain guidelines to do this. A desk in the middle of your living room does not count. Your home office space must be in a separate room and it must have a locking door. The office needs to be exclusively and regularly used for business. That means that if anything else is in there—for example, a web developer having an exercise bike in the room—you aren’t using it exclusively for business. Unfortunately, this means you can’t claim the swimming pool as a BBE, even if you frequently find yourself working from your poolside lounge chair.

The Business Equipment

Depending on your line of work, there may be equipment you’ve purchased specifically for business use. The important thing to pay attention to is whether you are using it strictly for business, or if you’re also getting personal use out of it. For example, you might have purchased a new computer for your home when you started your business. Here’s the thing—we all know you’re occasionally using that computer for unrelated web surfing, reading buzzfeed articles, or watching cat videos. How do we know? Because we do it, too. Always remember that if you are audited, it will be by a person from the IRS. That’s right. The IRS employs actual Homo sapiens, whatever you think of them. And they know all about cat videos. If you try to claim that 100% of the use of your new computer is business-related, it will be much harder for the auditor to rationalize than if you claim, say, 50-60% of your computer usage as business related. Keep things realistic and pay attention throughout the year to how much you are using “business” equipment for other things.

The Company Car

When you’ve started running your own business, you might be tempted to go out and buy a Ferrari as your company vehicle and expense it. You’ll end up getting that money back, right? Wrong! It might not be quite as thrilling, but you are much better off buying something that will last you a long time and be good on gas mileage. And this isn’t just your sage grandparent talking. If you buy an expensive vehicle, you’re only going to end up saving 15-35% in tax. On the other hand, let’s say you buy a cheaper, reliable car at about $25,000. If you expense it using the mileage method (versus the actual method) by keeping track of how many miles you drive for business, you would be able to expense $0.56 per mile at the current rate. Let’s say you put a total of 200,000 miles on the car over time. That is $112,000 worth of expense you were able to claim. You will do a much better job of getting your money back with the cheaper car than you will with the Ferrari.

The Travel Mileage

You also want to take precautions while tracking your miles if you’re using the mileage method to claim your travel expense. You need to keep a log book—it can be something very simple—that shows where you drove, when you drove there, and why. If you are ever audited and have claimed miles as a business expense, you can bet you will be asked for records of where you went. Furthermore, the auditor is going to check and make sure you didn’t say you traveled 500 miles to get forty minutes down the road. Make sure your mile counts are accurate. You also want to record the miles on the vehicle at the beginning versus the end of the year. If you have taken the vehicle in to get the oil changed, keep a receipt that shows how many miles were on the car at that time. Third party records are always a better form of proof than your own records.

The thought of being audited and having your business expenses analyzed does not have to be a scary one. The most important thing to remember is to be reasonable. Real life is not like the law shows on television—just because an IRS auditor can’t prove you didn’t need to go scuba diving in the Caribbean to design computer software does not mean he or she will let you keep it as a BBE. As long as someone can look at your expenses without raising an eyebrow, you should be able to write them off stress-free.

*BBE is a completely made-up term.

This article is for informational purposes only and does not constitute tax advice. For tax advice, consult a tax professional.

2 Comments

  1. Ken Farmer says:

    How do you write off products that are no longer used and you have in inventory for instance
    paper rolls and bill straps that have changed colors and you can no longer sell?

    • Breanne O'Day says:

      It’s always a good idea to consult a tax professional for advice on tax. This article is for information only and does not constitute tax advice.

      That being said, we think Publication 544 or Publication 17 on IRS.gov could be useful to you.

      If a business does a physical count of its inventory at year end, the inventory that has been thrown out will be counted in cost of goods sold. Cost of goods sold is determined by adding the beginning inventory to the year’s purchased inventory, less the year end inventory (per the count). There is no need to make a separate entry to account for the lost inventory. It’s not being included in the year end count would catch it.

      Another thing to think about is depreciation. None of the inventory assets of the business would be written off at the book value of the assets. For example, let’s say a computer is purchased for $1,000 at the beginning of last year. It has a 3 year use life and during year 2, it falls off the desk and can’t be fixed. Assuming the first year’s depreciation expense is $333 (1/3 of the value) when it became useless, it had a book value of $667. So at the end of the second year, the remaining $667 could be expensed, therefore reducing the book value of the useless computer to 0.

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