Understanding deductible business expenses can be a challenge for new business owners. Either they’re too careful, or they run their entire lives through the business. Keeping a clean set of books can help you analyze business trends, produce forecasts & real-time financial statements, keep you out of trouble, and save you a boat load on your tax return.
IRS Publication 535 : Business Business Expenses
This publication discusses common businesses expenses that are allowed by the IRS. The IRS defines a business expense to be tax deductible if it is both ordinary & necessary. An ordinary expense is one that is common in the industry. A necessary expense is helpful & appropriate for the trade or business. Generally, you cannot deduct personal, living, or family expenses. However, a personal expense that has a business component may be deductible- covered in a minute.
Record keeping Essentials: Methods of Accounting
The two basic methods of accounting are cash & accrual, although other methods are sometimes used. With the cash method you typically deduct business expenses in the tax year you pay them. In accrual, two things must be satisfied: all events have occurred that fix the fact of liability, and the liability can be determined with reasonable accuracy. Also, economic performance must have occurred.
Capitalized vs. Expensed
These are common terms accountants use, but basically asks if a particular expense is allowed to be taken as a deduction in full in the same year that it occurs, or will it be expensed out over its expected useful life? The quick answer is any single item that costs $2,500 or less is able to be expensed or deducted in full in the year it occurs. Of course, there are specific rules related to qualifying assets that exceed this amount including Bonus Depreciation & Section 179 that enable them to be expensed in full, but we would kindly ask that you reach out to setup an Appointment to further understand these technical issues.
Start-up Costs
Businesses may take several months, or even a year or so before they are officially ready to open. During this time, owners should treat all eligible costs incurred before beginning to operate the business as a capital expenditure part of their basis in the business. Start-up costs are recoverable if the business could deduct the cost if they paid or incurred it to operate an existing active trade or business and occurs before the day their active trade begins.
Expenses Paid Out-of-Pocket & Mixed-Use Expenses
Expenses that are paid out-of-pocket by owner can be reimbursed by the business. An Accountable Plan is a great way to keep track of expenses like these, and other expense that have both business & personal aspects of their use. For instance, a cellphone is often times used for both, unless there is a dedicated line setup for the business. The Home Office falls under this category of expenses. By applying the applicable percentage, the business owner may deduct a portion of their mortgage interest, real estate taxes, utilities, and other costs associated with the home office portion of the home. Similarly, a personal vehicle that is used for the business is allowed a deduction based on business use of the vehicle. Typically, accountants will offer convenient ways to keep track of these for their clients.
Simplified Methods
There are standards rates that the IRS allows businesses to deduct based on the square footage of the home office, and total mileage driven on a personal vehicle. The simplified method for home office offers a deduction of up to 300 ft2 at a rate of $5/ft2, but the area must be used exclusively & regularly for the business. For the personal vehicle used for business mentioned above the standard rate typically changes annually. In 2023, the rate per mile is 65.5cents per IRS.gov.
Save Money with Clean Books
With clean books you will ensure you are booking transactions in real time. It is much easier to remember the details of a transaction that occurred this month, rather than trying to figure it out 8 months down the road. The biggest way you can save money that doesn’t really get talked about is your tax preparer can process a tax return much quicker than when there’s issues that need fixed. The best route is to find a tax preparer who does bookkeeping, so they have a firm understanding of the books before starting the return. Click Here, to learn more about our full line of services.
Distributions Are Not Expenses
Distributions are a great way to get money out of your businesses. Instead of swiping a business card for every personal transaction, a savvy business owner will understand their monthly budget, and have a reliable forecast of which to base their monthly distributions. We will typically perform a Forecasted Projection for our business clients once per year in order to gauge results, and the tax implications. This allows plenty of time to put into place strategies that may help them to reduce their tax liability.
Do I Need Quickbooks
Not all businesses need a subscription to Quickbooks. Businesses with a large volume of transactions should strongly consider one, though. But smaller businesses with minimal transaction can manage just fine with Excel or some other basic data entry system. Often times, accountants will have a ready-set Excel Worksheet for clients, and this works perfectly. Our New Client Package includes one of these ready-set workbooks when this method is preferred over Quickbooks Online.
Summary
The Business Owner's Guide: Business Expenses & Record Keeping Essentials is merely a guide. Many businesses will have custom needs, and their expenses will reflect so. Having a good understanding of what expenses are allowed for your business is critical to keeping a clean set of business books. Not all businesses require a bookkeeping subscription or bookkeeper to maintain their records. For those in need, Rangeview Tax & Accounting is a Full Service Tax & Accounting Firm offering all of the essential services which allow you to focus on your business! Please reach out for a free consultation and ensure that we’re a great fit for you!
Book a Free Discovery Appointment
See if Rangeview Tax & Accounting is a good fit for you with a Free Discovery Chat! We offer in-person, on-site, and telephone discovery chats. On site chats are typically business with exceptions available under appropriate circumstances for individuals.
Book a Paid Consultation
Our paid consultation is $100 and puts you on the line with a tax professional who will answer questions that you have related to IRS Code, and Tax Strategies. Pay for your consultation, select one of the available appointments, and provide the general topic of discussion or questions that you wish to discuss. If you choose to move forward with our services, we will credit the consultation fee towards a future tax return preparation.
Tax Projections
Stay on top of the upcoming filing season with a tax projection! We will collect various data including current pay stubs, expected business income, and more extraordinary situations like selling a home, rental, or business. From there we annualize the figures and run a mock tax return to get a good idea of an expected tax liability. This gives us a baseline in which we can further advise tax planning strategies that may apply.
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