Business owners know that most of their expenses are deductible. But it might surprise you to learn how many leave money on the table by not claiming all allowable write-offs.
Overlooked Business Deductions
Here are the most commonly overlooked deductions.
Your tax activities in prior years sometimes yield deductions in the present. So check prior year tax returns. Look for any carryovers of unused amounts. Examples of carryovers include net operating losses, capital losses, charitable contributions, investment interest, and home office deductions.
You probably know about the home office deduction. But you may worry claiming it sends a red flag to auditors. Don’t be afraid to claim this deduction if you qualify. Today more than half of all businesses in the U.S. report as home-based. So the IRS won’t view home office deductions with the same suspicion as in the past. In fact, the IRS has created standard deduction for home office use you can use instead of deducting the actual costs of using space in your home for business.
If you started your business in 2018, check for any deductible costs you may have had before you opened your doors. Usually these costs are treated as capital expenditures (added to your investment in the business). But you can elect to deduct these costs up to $5,000 in your first business year. Any remaining amount is then amortized (deducted ratably) over 15 years.
Fees you pay to maintain your business checking account, access the ATM, obtain new checks, and other banking fees are fully deductible. Review your bank statements to see what fees you paid and can deduct.
Things can go wrong, forcing cancellations of various plans. For example, you may have booked a business trip and had to reschedule. The airline rescheduling fee as well as the hotel deposit you lost are deductible.
If your business advanced money to someone … an employee, a customer, a vendor…and you haven’t been repaid, you may be entitled to a bad debt deduction. If it is a business bad debt that becomes partially or wholly worthless, you deduct the amount as an ordinary business deduction.
If you personally loaned money to someone who hasn’t repaid you (and you can prove that the debt is now wholly worthless), you can take a short-term capital loss for the outstanding debt.
Incidental travel expenses
Travel isn’t cheap and you’re not likely to overlook the cost of a plane ticket or a hotel room for a business trip. But you could easily forget the incidental travel expenses that add up quickly. Examples: Fees for checked baggage, extra baggage fees for taking heavy or oversize items, tips.
Be sure to look at the fees you paid for tax return preparation during the year, and not the year to which the fees relate. For example, you own an S corporation that paid fees in March 2018 for preparation of its 2017 tax return. The fees are deductible on the corporation’s 2018 tax return.
While there are tax breaks that can be used to write off the full cost of certain property purchased by the business, if you don’t or can’t use these breaks, then you must recover your cost through depreciation. Don’t overlook remaining depreciation allowances. Again, check prior year returns for depreciation opportunities. Find information about depreciation in IRS Publication 946.
You may pay out of petty cash for items that are deductible. Examples: business and trade magazines you buy at a newsstand, coffee with a customer, or a taxi ride to a vendor. Like incidental travel expenses, these miscellaneous items can add up to a big write-off. The key to deducting them is to have required substantiation for each expenditure. The IRS has guidance on the types of records to be kept, but this doesn’t cover all situations. Suggestion: when you can’t obtain a receipt, take a photo with your smartphone (which is imprinted with the date) and maintain a log of miscellaneous expenses; it can’t hurt.
Review all of your outlays in the year with your CPA or other tax advisor. You may also want to run through all of the categories of business deductions, which are listed in IRS Publication 535.