For business owners, it’s always wise to keep up with the expenses you intend to use as tax deductions. After all, you never want to be in the position that you’re overpaying your taxes!
This article will cover the basic tax deductions you can take as a business owner. We will also cover some of the records you should keep in order to make your life easier come tax time.
Before we continue, Financial Professional wants to remind you that all materials in this article are educational in nature. This article is not investment advice. Always consider your personal situation – and the help of a licensed financial professional – when making any investment decisions.
Travel Expenses as Tax Deductions
Current tax law allows you to deduct two types of travel expenses related to your business: local and away from home.
With local travel expenses, you can deduct transportation costs incurred for business purposes, such as the cost of getting from one location to another via public transportation, rental car, or your own vehicle.
In fact, even if you have a home office, business trips to and from your place of business are considered deductible. However, you can only deduct lodging and meals if you stay away from home overnight.
Furthermore, current IRS laws don’t allow you to deduct meals and incidental under local travel expenses anymore, but under some circumstances, you can deduct meals as an entertainment expense.
For away from home travel expenses, you can deduct expenses such as meals and incidentals, as well as travel expenses. However, if you’re reimbursed by your employer for your expenses, your deductions might be limited.
Let’s cover these travel expenses more in depth.
Away From Home Travel Expenses
To be deductible, the IRS dictates that travel expenses must be “ordinary and necessary.”
For instance, you can deduct 1/2 the cost of meals and all lodging expenses while traveling away from home. In other words, if you’re away from your regular place of business for longer than an ordinary day’s work, and you need to sleep or rest to meet the demands of your job, half of your costs are tax-deductible as a business owner.
However, the IRS lets you deduct 100% of transportation expenses as long as they are true business expenses.
Now, an important question to consider is where “home” is for tax purposes.
The general view is that your home is your place or business or your post of duty, not where your family lives.
For example, let’s say that Jim’s family lives in Scranton, but he works in Stamford. Jim spends the weekends in Scranton with his family, but he stays in a hotel in Stamford during the week. Additionally, Jim eats out all three meals a day while in Stamford due to not having a kitchen at hand.
In this scenario, Jim’s “home” is in Stamford for tax purposes. Therefore, he can’t deduct the cost of traveling back and forth between Stamford and Scranton from his taxes, nor can he deduct the cost of his hotel stays, eating out, or any incidentals.
The costs that he can’t deduct are known as non-deductible commuting costs.
Deductible Travel Expenses
To make life a little easier, we’ve compiled a list of the most common deductible travel expenses, such as the cost of:
- Meals and lodging while traveling to or while at your away-from-home place of business (50%)
- Having your clothes cleaned and pressed
- Your business phone
- An away-from-home secretary
- Transportation between job sites
- Airplane, bus, or train tickets
- Automobile-related expenses
Non-Deductible Travel Expenses
We’ve also put together a list of some of the costs you can’t deduct from your taxes as a business owner, such as:
- The costs of traveling between your home and your job
- Trips that are educational in nature
- Travel and other costs incurred while you are searching for a new place of business
Directly Related Expenses
One important thing to note as a business owner looking to use expenses as tax deductions is that the IRS requires deductions to be “directly related” expenses. To prove your expenses qualify, you must be able to show that:
- Business was conducted during the entrainment/travel
- The main purpose was the active conduct of business
The IRS believes nightclubs, theatres, sporting events, or cocktail parties are not business expenses. However, if you can prove that you engaged in a business transaction, then you’ll be able to take a deduction.
Record-Keeping and Substantiation Requirements
In order to take any of the aforementioned tax deductions in the role of a business owner, you must be able to prove two things. First, you have to show that the purpose of the expenses was business-related. Second, you must be able to prove the amounts of your travel, entertainment, transportation, and business gift costs.
Thus, it’s essential that you keep records of your various expenses in order to prove to the IRS that they were legitimate business costs.
To substantiate the tax deductions you hope to take a business owner, these records must show:
- The cost of your expenses
- Time and place of the travel, entertainment, or recreation
- Business purpose of the expenses
- The business relationship of the recipient of entertainment or gifts
There are some entertainment expenses that business owners are allowed to count as a deduction under the current law. However, you must be able to prove the following for each deduction you claim:
- The amount of each separate expense (though incidentals may be totaled daily)
- The date of the entertainment
- The name, title, and occupation (showing business relation) of the people you entertained
Business gifts are a common way to show appreciation to or from a business (as well as to take a deduction on your taxes). In order to actually take the deduction, however, you must keep the following documentation to substantiate your claim:
- The cost of the gift and the date it was made
- The business reason for the gift
- The name, title, and occupation of the recipient
- A description of the gift
There are several types of auto expenses that business owners incur, many of which count as tax deductible items. However, when it comes to actually filing your taxes, there are two separate methods of reporting your costs:
- The standard mileage deduction, which is an inflation-adjusted number multiplied by the number of business miles driven
- An itemized deduction, while allows you to deduct actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, chauffeur salaries, and depreciation
The standard mileage rate produces a larger deduction for some business owners, while others fare better (tax-wise) by deducting actual expenses. Figuring your deduction using both methods tells you which method is better for your situation.
The tax deduction options and amounts available to business owners depend on the percentage you use the vehicle for business. For instance, if the vehicle in question is used for business 50% or more of the time, it can be included as business property and qualify for Section 179 expensing in the year of purchase.
The deduction is then reduced proportionally to the extent the car is used for personal purposes.
However, if you take this deduction, you can’t use the actual mileage for the vehicle in any year.
Assuming that your car cost more than the Section 179 limit, or Section 179 is not available or claimed, depreciating the vehicle is also allowed.
There are several depreciation options available, but there are also limits to the amount of depreciation business owners can claim on their tax deductions in a given year. Furthermore, depreciation otherwise allowable is reduced by the proportion of personal use – for example, a car used 20% for personal use is depreciated at 80% of the amount otherwise allowed.
The best thing you can do to make the most of your auto deductions is to keep detailed records of your expenses. Not to mention, this documentation is essential in case of an audit. Additionally, you won’t be able to determine which of your two tax deduction options is better if you don’t know the number of miles driven and the total amount you spent on the car.
Furthermore, the tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. If you use the actual cost method, you’ll have to keep receipts as well. To make tracking expenses simpler, consider using a separate credit card for business purposes.
A Final Word on Tax Deductions for Business Owners
There are many ways you can take deductions and minimize your tax bill as much as possible. This article serves as a guide on what you can – and can’t – do as a business owner who wants to save a lot of money through tax deductions.