Help! I Think I’m Missing Tax Deductions!

small business tax deductions May 18, 2023

You’ve asked yourself more than once if you’re missing deductions at tax time, right? I mean, your golf buddy just fully wrote off his brand new pickup truck. He saved thousand in taxes! Why can’t you do the same?

First of all, do yourself and your business a huge favor and take the word “tax” out of your decision tree. You cannot build or grow a successful business by making decisions based on how much you’ll save in taxes each year. Those rules change annually, and sometimes retroactively, so deciding how to spend your business’s hard-earned revenue based on today’s tax laws is like trying to lose weight based on the latest diet trend. The perfect answer today could be horrible for your health tomorrow.

You should also start thinking of your business as a separate living, breathing entity that needs to be fed and nurtured. Your business is not you. The business should spend its revenue on things that will make it grow and become more profitable, no matter who is at the helm and signs the checks. Sometimes these items will be deductible at tax time. Sometimes they won’t. No two humans are alike in what they require to thrive. Focus on what your particular business needs to make it healthy and happy.

Employees - The business needs humans to keep it alive and moving. It will need to pay for wages, payroll taxes, health insurance and pension contributions. The company should also spend time and money training and educating its humans to make processes run more efficiently. Most humans also appreciate their mental health needs being met with rewards such as holiday parties, small gifts, and maybe even a trip or outing. {Tax Tip - Most of these expenses are fully deductible. However, there are cases where employee gifts or other reimbursements need to be included in a W2.}

Housing - The business will require shelter of some sort for its employees and daily operations. That can come in many forms from renting a space, to purchasing a building, or using a home office. These buildings will also require the payment of utilities, real estate taxes, and repairs. {Tax Tip - Most of these are 100% deductible. And don’t skip the home office deduction as long as the business is utilizing a space in the owner’s home exclusively for business purposes.}

Clothing - The humans that keep the business alive may require clothing to represent the entity or perform their jobs safely. Construction companies need to provide hard hats, work boots, and other safety gear. Hospitals require that scrubs be worn and many retail establishments require shirts with the business logo or other advertising printed on them. But if the humans (even owners) are wearing clothes that don’t directly benefit the business and generate more revenue, would the business entity want to cover that expense? {Tax Tip - Safety clothing, uniforms, and clothing with logo are generally deductible. Clothing that can be worn outside of the office and personal care such as hair and makeup are not.}

Food - The humans that operate the business need to be fed. The business should consider if the cash spent on meals is providing nourishment and growth to the company in some way. A meal with a prospective client could lead to additional revenue. An employee’s fancy latte on the way into the office, or grabbing a bite on the way to a client’s is not. Providing meals for employees so they can work overtime is hopefully adding to the bottom line by getting product out the door faster and is probably money well spent. Entertaining prospective clients and taking them to a ballgame is a great way to build relationships which in turn yields additional long-term revenue for the company. {Tax Tip - Some may be 100% deductible, some may be 50% deductible and some not deductible at all, such as client entertainment. But the business should consider if it would be better off in the long run by spending money on these things, even if it has to forego saving some taxes in April.}

Marketing - Customers are the lifeline of the business. What expenses are necessary to bring in additional revenue to keep the heart pumping? The company needs to introduce itself to the world via social media and Google ads, video creation, and personalized gifts that it hands out to customers or at conferences. It may also sponsor a child’s sports team or a hole at a golf outing to get noticed and create goodwill within the community. {Tax Tip - Most marketing expenses are tax deductible. Client gifts do have limitations though as they are only deductible up to $25 per client.)

Travel - The business often needs to transport its employees in order to bring in more business by allowing them to visit clients or offices in other cities. Employees may also need to travel for educational purposes. Airline tickets, tolls, car rental, hotels, and meals while away on business are all expenses many businesses need to cover in order to get work done and keep clients happy. Other travel is often necessary for employee morale, or to help the humans recharge their batteries. The business needs to determine if this is the best use of cash flows to aid in the ultimate growth of the business. Or is this something employees and owners should be paying for personally? {Tax Tip - Travel for specific business purposes is generally deductible. Commuting or anything that could be viewed as a vacation is not.}
Vehicles - Your business should only purchase vehicles that will allow it to transport goods or employees to customer sites on a regular basis. If the business determines that a vehicle is necessary, it will also need to pay for the related upkeep (such as fuel, licenses, insurance, and repairs) used in the day-to-day operations. In many cases, vehicles are not necessary for the business and employees (including owners) are simply using personal vehicles to get to the office on a daily basis. The business may need to “borrow” an employee or owner’s vehicle occasionally to run errands or meet with clients. In this case, the business should pay the human for the use of their vehicle by reimbursing them for each mile driven. The best method is to reimburse the employee based on the current IRS mileage rate. {Tax Tip - These deductions are based on facts and circumstances and reviewed heavily by the IRS. If the business was sold to another owner, which vehicles would be included in the sale? Any not on that list should usually be treated as personal vehicles for tax purposes. Mileage logs should always be kept on any vehicles used for business and personal purposes as the IRS will want to see how you arrived at the ultimate tax deduction.}

Supplies - The business will need to purchase equipment and supplies that will allow employees to perform daily functions and create any product sold. Large machinery may be required, as well as office equipment such as computers and telephones, office supplies, and cleaning supplies for the building. {Tax Tip - Don’t get sucked into year-end purchases just to save taxes. Will that purchase aid the business in its day-to-day operations? Or will it sit idle just to provide a quick tax write-off? Would the business be better served spending $50,000 on a piece of equipment, or paying $10,000 in tax and having $40,000 still in cash to grow in the coming years?)

There is no set list of deductible business expenses. The IRS simply states that expenses must be “ordinary” and “necessary”. That’s the vague and not always simple definition. There are specifics and limitations in certain situations, but don’t waste time overthinking things. As a business owner, focus first on creating and growing a profitable business by spending money where it will best generate additional revenue and create a happy and stable employee base. Leave the tax thoughts and decisions until you are in the enviable position of having a tax problem to solve and then invest in tax planning with your CPA.