Business Owners: Are you taking advantage of these deductions?

Tyler Kert
Tamarack Wealth Management

It’s that time of year again - time to gather your tax documents. If you are an employee, your tax return might be relatively simple. If all you have is a form W-2, you aren’t able to deduct additional business expenses. In fact, many times individuals don’t need to keep track of their itemized deductions either because the standard deduction is relatively high. But if you are a business owner, you have an obligation to track the income that you make and the expenses that you accrued over the past year.  

Business owners must keep an eye on their financial situation so that they can work to minimize expenses and cut unnecessary costs. Increased revenue is always a chief concern of business owners. But when it comes to reporting your income after the year ends to the IRS, the goal switches. Now, it’s time to make sure that you recognize all of your expenses and minimize your income to ultimately minimize the tax you will owe. Clearly, you can’t go back and change the past. But through careful record keeping and tracking of expenses, you can optimize your presentation of what happened in the past. 

Are you taking every tax deduction you have available to you? Here are a few deductions that you should consider if you haven’t already. 

Cell Phone 

Cell phones have become such an integral part of our lives that it is almost hard to imagine life without them. If you are a business owner, the chance is extremely high that you are using your cell phone for business purposes at least some of the time. That said, cell phones are also used extensively for personal use. Most of the time, when an item is used partly for business and partly for personal use, it is appropriate to allocate the expense accordingly. However, cell phones are very difficult to split. Yes, you can calculate the percentage of calls and data that is used for business, but it can be argued that it is impossible to use half a cell phone for anything. Therefore, if you are using your cell phone for business purposes and not deducting it as a business expense, you’re missing out on tax savings. Taking advantage of this deduction alone can keep more money in your pocket at the end of the year. 

Business Use of Home: 

Ever since the pandemic, working from home has become increasingly popular. COVID-19 forced many companies to adopt technology that allows them to operate remotely. Do you have office space in your home that you use for your business? If you do, you can take a business use of home deduction on your tax return. I’m not going to get into the specifics of how this deduction works because it is unique to each specific situation. But this deduction can be significant depending on the size of your home office and the cost of your home utilities. Work with a CPA and educate yourself on how to take full advantage of this deduction. 

Charitable Contributions vs Advertising: 

It is important to categorize expenses correctly. Mislabeling expenses can cause you to lose those expenses altogether. For example, if you decide to sponsor a local youth soccer team by purchasing their uniforms, you might label that expense as a donation to the soccer program even though your company logo is listed on the t-shirts. Donations to charitable organizations are not deductible by a pass-through entity like a partnership or S-corporation. Instead, these donations are passed through to the shareholder or owner of the company to be listed as charitable contributions on their personal return. If an owner or shareholder isn’t itemizing their deductions, they will lose out on this tax deduction altogether. In the above example, this expense should be categorized as advertising because the company is receiving publicity from their sponsorship. Then, the deduction will be fully realized. 

There are, however, limitations to this strategy. The IRS will not allow you to categorize donations to your church as advertising. But when you are making a donation and receiving advertising benefits, you will benefit from a tax perspective to categorize that expense as advertising rather than charitable contributions. 

Conclusion 

In conclusion, cell phone expenses, business use of home, and correctly categorizing your expenses are just a few examples of things to watch out for as you are finalizing your tax documents for 2024. You can’t go back and change the past, but you can review and make a plan for the future. Because of the specific nature of taxation, I highly recommend reviewing your financials with a CPA to maximize your tax savings and opportunities for improvement. Small improvements can make a significant difference in the long run.

This material is for informational purposes only and does not constitute financial, investment, or tax advice. Please consult your tax advisor or financial planner to discuss your specific circumstances before making any decisions.

Tyler Kert, a licensed financial advisor and CPA, provides financial planning and tax consulting services at Tamarack Wealth Management in Cashmere, WA.