There’s an old saying that sums up life pretty well. “Only two things in life are guaranteed: death and taxes.” Businesses, especially small businesses, may not dwell on the former so much, but they do spend a great deal of time with the latter.
That’s to be expected. Failure to file your business taxes correctly can not only result in higher tax payments but also potential legal trouble. However, what many small businesses, especially those in their first year, fail to realize is just how much they can save. There are dozens of different tax deductions available – you just have to know which ones you can apply. We’ll explore four of the most commonly overlooked tax deductions in the following article.
#1. Meal Expenses
Whenever a business treats its employees to a group meal, those costs can count as a tax deduction. The IRS specifies in Publication 535, Chapter 11 that meals can be deducted at up to 50% of the total cost.
Many businesses don’t take advantage of this cut, primarily because it does come with some restrictions. In particular, the meal tax credit won’t apply when:
- The food is provided by the business regularly. This includes things like snacks in a breakroom or food in an on-site cafeteria.
- You cannot deduct entertainment costs as part of a meal. For example, if your office went to a baseball game, the hotdogs and sodas would be deductible, but the tickets wouldn’t be.
- Instances where the meal is counted as part of the entertainment. For example, if you take your employees to the Dixie Stampede dinner show in Pigeon Forge, Tenn., the food and entertainment are rolled into one expense.
#2. Contributions to a DCAP/FSA
In instances where you employ a nanny to care for your children, you technically qualify as a small business. This is because the IRS may categorize you as a household employer, and start charging you certain taxes. One way you can save on what is commonly referred to as “nanny taxes” is to contribute into a DCAP/FSA.
What is a DCAP/FSA?
As explained by the SHRM, a Dependent Care Assistance Program (DCAP), sometimes known as a dependent care flexible spending account (FSA) is a fund that you can pay into to aid in the care of a dependent. Contributions into a DCAP/FSA reduce the total amount of taxable income you bring in and can be used to pay things like your nanny’s wages or your household employment taxes.
What are the Restrictions?
The IRS has set the maximum amount that a DCAP/FSA can carry at $5,000. If you and your spouse plan on filing separately, the limit drops to $2,500 each. Additionally, in order to qualify, your child must be no older than 12. Children aged 13 years or older with special needs also qualify. You can use an online tax calculator to see how much you owe in household employment taxes, and how much you stand to save by using a DCAP/FSA.
#3. Home Office Space Deductions
If you have a work-from-home small business, you can deduct certain expenses related to operating your business. The Balance reports that the safest way to ensure you’re maximizing your deductions is to take the following steps:
- Remove all objects for personal use from your dedicated workspace, including dart boards, video game consoles, board games, TVs, etc.
- Separate your personal files from your business files and remove them from your workspace
- Have separate computers and printers – one set for personal use, one set for business.
Once you’ve made these separations, many purchases and alterations you make to improve your home business are tax deductible. For example, buying printer paper, writing utensils, staples, and other office supplies are tax deductible, so long as they’re used exclusively for business purposes.
#4. Driving Expenses
If your business involves a lot of travel, you are eligible to deduct driving expenses from your tax obligations. Many businesses are aware of this, but many end up being audited because they don’t record and report their deductions correctly. To safely claim driving expense deductions, do the following.
Choose the Deduction Method
There are two methods for calculating the mileage expenses you incur – the IRS standard mileage rate and calculating actual expenses. Each has their share of pros and cons. The most important thing to remember is that once you commit to a method, you can’t change it each year.
Keep Immaculate Records
If your business is going to claim driving expense deductions, you’ve got to be able to back them up with records. Additionally, you need itemized receipts from the time you paid. If you try to file a claim with after-the-fact reports, but no logs or receipts from the time you paid, you’ll probably find your claim denied, and owe more in taxes.