“I admire your creativity on determining your tax deductions this year, and I’ll be sure to use the same creativity in the letters I write to you in jail.”
Certainly not the statement anyone is looking to hear from the IRS or their accountant. Generally, tax deductions swing from one extreme to the other if left up to the individual tax preparer. On the one hand, there is the fear of being overly creative like in the first example, so many will be way too conservative in claiming deductions, thereby leaving hard earned money on the table. Or there is the danger of using a little too much creativity in what you can manipulate into a deduction. Deductions can be tricky and overwhelming, so it’s best to hire a professional to help you properly navigate this territory.
There are four Categories of deductions to remember when tracking expenses throughout the year.
- Use of home
- Vehicle Deduction
- Child Labor
- Other Expenses
Home use is the deduction allowed for the use of your home as your office for your home based business. A few expenses associated with this use are mortgage interest, rent, utilities, insurance, repairs and maintenance. The deduction is calculated as a percentage of your home used for your business. For example if you own a 1,000 square foot home and 100 of that square footage relates to your business, that allows you to deduct 10% of all those expenses previously listed and take them against your income.
Vehicle deductions can be calculated one of two ways. The first is the mileage tracking and the second is actual expenses (depreciation of your vehicle, maintenance and gas expense). The mileage is the easiest to track especially now in the days of smart phones and apps that will do it for you whenever the car is in motion. Deductible mileage is any business miles you drive -- to and from post office, client meetings, client sites, business sites, dry cleaners for work clothing, etc. The current government approved mileage rate is $0.54/mile. Mileage deductions can be very significant to your taxable income - if you travel 10,000 miles in a year related to your business, that’s a deduction of $5,400 offsetting your taxable income for the year.
Child Labor deductions are ones many will forget or aren’t even aware of. The IRS code states that if a child is under eighteen years old and earns less than 6,300/year, this income does not have to be reported on a tax return. The code also states that the employer who pays this expense can deduct this amount from their taxable income. A few scenarios may be if you have children living at home and they help file paperwork for you - you can pay them a salary rather than an allowance and deduct this from your income as long as you don’t exceed $6,300 annually. A few other examples of ways your children can help you in your business: cleaning the house before clients arrive for meetings, taking care of the dishes or meal planning while you are working in your office or clearing the table from a business dinner you hosted, etc. Another example of using child labor deductions for your advantage is allowing your child to pay his own insurance out of the salary that you pay him. This allows you to deduct the cost of the insurance you have on your child.
There are a total of 256 different business expenses that are allowed as deductions. These range from cell phone use, meals and entertainment, travel, product sales, and the list continues in this fashion. Deductions can be significant to changing how much tax you owe for the year and it is to your advantage to go through the list of possibilities with a professional to ensure that your tax return is exactly as it should be.
Creativity is a beautiful thing and we at OTBTax applaud it -- just not when it comes to your tax deductions list.
We know you have questions. To chat with us (with no obligation) about your specific situation, give us a call at 888.409.1589. We will have you back to More Relaxing, and Less taxing before you know it.