1) Home Office
If you have space in your home that you use exclusively for working on your business, the bills for utilities, homeowners association fees, homeowners insurance, mortgage interest, property taxes, and general repairs and maintenance are deductible for that portion of the home. The percentage of square footage of your office space divided by the total square footage of your home is the percentage that is tax deductible.
Do you find yourself talking about your business while you’re eating? Great news! The IRS allows taxpayers to deduct 50% of their business meals with customers, clients, or employees. Transportation costs to and from a business meal maybe 100% or 50% deductible depending on the facts. Beware, under the new Tax Cut and Jobs Act, entertainment deductions are no longer deductible.
3) Retirement Funds
There are several retirement funds that business owners can use for their employees and themselves to reduce their tax liability. For instance, the maximum contribution for a 401(k), which is an employer-sponsored plan is $18,500 with a $6,000 catch up for participants 50 or older. Self-directed individual retirement accounts allow you to $5,000 or $6,500 if you are 50 or older. For all these strategies, we recommend that you speak with a tax professional that knows your specific situation to provide you guidance to implement these strategies.
5 IRS Red Flags
- Not Reporting All Taxable Income
The IRS receives copies of all the 1099s and W-2s and has a good sense of what your income should be for the year. If there is a mismatch between the income the IRS has recorded in their systems and what you report on your tax return, that’s an automatic red flag. If you happen to receive an inaccurate 1099, be sure to contact the issuer as soon as possible and request that they file a corrected form with the IRS.
2. Taking Higher-than-Average Deductions
Many people attempt to take excessive business tax deductions to reduce their taxable income. The IRS is fully aware of this behavior and is on the lookout for individuals abusing this tax advantage. Common areas of abuse include meals and travels which are often personal. Additionally, the 2017 Tax Cuts and Jobs Act (TCJA) no longer allows expenses for entertainment, so be sure to exclude them from your deductions.
3. Writing Off Losses for a Hobby
By definition, the IRS defines a trade or business as any activity carried on for the production of income from selling goods or performing services. As such, the IRS expects your trade or business to generate profit three out of every five years (or two out of seven years for horse breeding). The IRS knows that many individuals create a business entity in hopes of taking deductions and reducing taxable income.
4. Claiming 100% Business Use of a Vehicle
As you can imagine, using your vehicle 100% for business is rare, and the IRS knows that this is an area for abuse. If you use a vehicle exclusively for business, be sure to keep detailed mileage logs, calendar entries of business activity, and the purpose for travel. Additionally, if you use the IRS’s standard mileage rate, you can’t claim maintenance and insurance since these are calculated in the rate.
5. Giving too much to charity
Though you may be very generous, giving more than average to a charity may trigger a red flag. The IRS has a good sense of what people in your income level tend to contribute to charity. This is not to discourage you from giving, as long as you maintain detailed and accurate documentation of your contributions you should be fine.