The absolute best way to ensure there is no tax liability is to take full advantage of the tax deductions available to you. The typical deductions for an entrepreneur include advertising, insurance, office expenses, required equipment or materials. While those are seemingly straightforward, other deductions can appear more complex.
Car and Truck Expenses
If you travel for business, no matter the distance, you may deduct the expenses associated with the travel. When you are deducting the expenses for your “work car,” there are two routes to take. On one hand, you can deduct the actual expenses associated with your vehicle. This includes expenses for gasoline, oil, repairs, insurance, license plates, etc. The IRS does not allow for deductions on lease expenses. On the other hand, you can deduct the mileage associated with your vehicle for work purposes. When taking this route, it is important to know how many miles were displayed on the odometer at the beginning and end of the tax year. Once you can determine how many miles were used on business versus personal, you will be able to deduct 58 cents per mile for the 2019 tax year.
If you have paid a nonemployee to perform any services for your business or trade, you are able to deduct the amount you have paid. You must remember to file Form 1099-MISC if you have paid any individuals more than $600 with the exception of corporations. Most small businesses which operate as sole proprietorships, partnerships and LLCs require these 1099s.
The depreciation deduction is reserved for expenditures, expenses which generally have a useful life greater than one year. Due to recent changes in the law, you are now able to deduct 100% of the cost for your expenditures. For example, if a baker purchases an oven for his business, he can deduct the full price of the oven as opposed to prior years where he would have to amortize the deduction.
Repairs and Maintenance
You can deduct the cost of incidental repairs and maintenance that do not add to the property’s value or appreciably prolong its life. However, you are not able to deduct the value of your own labor in repairing or maintaining your property. Furthermore, you cannot deduct the amounts spent to restore or replace property, they must be capitalized.
Supplies and Equipment
You also can deduct the costs of books, professional instruments and equipment, etc. As with any other expense, it is required that you normally use the supplies or equipment within a year.
Education may also be deductible under supplies as education can be an essential expense in increasing one’s business productivity. Education expenses can include books, supplies, lab fees, and similar items.
The IRS does not consider clothing to be a tax-deductible expense unless it is ordinary and necessary to the business.
Travel and Meals
It must be made clear that the IRS no longer allows for entertainment deductions. However, travel and meal expenses associated with your business are still fair game.
For travel expenses, you can deduct the costs of travel fare, such as air, bus, or train. Travel expenses also include the costs for lodging, including hotel tips, fax services, internet, etc. Also, your trip cannot exceed one year.
For meal expenses, you can deduct 50% of your costs. The IRS requires that the meal expense was not lavish or extravagant under the circumstances and was a meal shared between you (or your employee) and current or potential business customer, client, consultant, or similar business contact.
If you spend some of your business trip vacationing, you are only allowed to deduct the expenses associated with the business days. You are still able to deduct for the entire trip if there are more business days than vacation days.
If there is a portion of your home that you use exclusively and regularly for business, you may be able to receive a home office deduction for your business. The IRS allows you to write off everything from utilities to rent in proportion to the size of your office compared to your home. Even if one is constantly on the go as a plumber, if the home office is used for administrative and management work, the plumber may deduct the home office.
The key to paying $0 every year is to start early with proper accounting. By making business decisions based on future tax liability and taking full advantage of each deduction, you too can reap the benefits! Keep an eye out for our third and final installment of the Tax Time series - filing is just around the corner!