When starting your new business, you are probably not thinking about your tax return at the end of the year. You have a whirlwind of activity and things to focus on – getting proper licenses, setting up a business location, getting supplies and equipment, growing your client list, hiring employees, and so many other things.
When I sit down with a new business client, we discuss all the things they had to do to get their business started, because most of them are items that are deductible at the end of the year.
Here is an exercise you can do to improve the deductions you can claim at the end of the year. All you need is a notebook, a large manila envelope, a cup of coffee, and about an hour of quiet, undisturbed time. If your business is a partnership (husband and wife, or two friends), it would be helpful for you to do this together.
Just answer the following questions:
- Do you have a home office? This is a space dedicated only for the use of your business, the main place where you work on your business.
- Write down the total square footage of your home, and the total square footage of your office.
- Look around the office and list EVERYTHING you had to purchase to start your business. Desks, computers, a copier, office supplies, a new phone line, Internet connection, security system, etc.
- Did you have to do anything to your home office room to get it ready for business? Did you paint, install shelves, put in a new carpet or light fixtures?
- Do you regularly meet clients at your home office?
- Compile a list of ALL home expenses. This could include mortgage payments, property taxes, natural gas, electric, telephone, Internet, water/sewer, parking (if you have to pay for parking), landscaping/lawn care, homeowner association fees, as well as any and all repairs to the home.
- Do you have a business location outside the home? In other words, do you run your business from a commercial building? This could be anything from a retail space in a shopping mall, to a rented office, to a storage unit. If so, answer the questions above, but for your commercial location.
- Did you use any of your personal assets for the business? One example of this is a computer purchased for your personal use at home, but you now use it for the business. Another example would be a personally purchased pressure washer, lawn mower, or other tools that you now use for the business. If so, write down when you purchased them, the cost, and their approximate value the day you started using them for the business.
- Do you sometimes go to Office Max or Staples to get something for your business, and pay for it with your personal funds? Record these purchases, and keep track of the receipts.
- Do you use a vehicle for your business? This could be your own vehicle, or a vehicle used only for the business. If so, you need to track mileage. You basically have two options:
- Keep a notebook in the vehicle, and write down your mileage and the purpose for each trip
- Use a mileage tracking app like MileIQ to automatically track your mileage. I strongly recommend using a mileage tracking app to make this simple.
- Do you use your personal money to:
- Take clients out to lunch?
- Pay for a company holiday party or barbecue?Keep the receipts – these expenses may be deductible.
- Do you pay self-employed health insurance? You may be able to deduct 70% of your health insurance premiums.
- Do you use your personal cell phone for business (this includes calls, texts, and/or Internet use)? If so, keep a copy of your phone records and highlight the business related calls/texts.
- Do you purchase fuel for your equipment? This includes lawn mowers and other landscaping equipment, pressure washers, carpet extraction equipment and related items? If so, keeping your receipts might allow you to take a credit on the tax paid on fuel. (Note: as of 2017, the credit is over 18 cents/gallon.)
- Did you buy any equipment? For many small businesses, this can be a large expense. A new landscaper might need a truck (or two), a trailer (or two), a lawn mower (or several), trimmers, edgers, etc. This is a big one, and is related to the home/business office questions. Be sure to document every piece of equipment you purchased. Some can be expensed; some can be depreciated. The documentation you have may help significantly lower your tax liability.
These are only a few deductions that overlooked by new business owners. If you have not started, I strongly suggest sitting down and writing down your answers to these questions, then give me a call. Let us help you get your tax bill as low as possible.