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Surveying the Landscape of Small Business Tax Deductions

November 22, 2020 by Heyward CPA

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Photo by Solo Shutter from StockSnap

Business expenses are the cost of carrying on a trade or business, and there may be some tax breaks there. But a lot has changed in recent months, and the rules can be complicated.

Are there business deductions you can take advantage of? Yes, but first you have to make sure your expenses are truly business-related. The lines can blur, especially with a small business, because you generally cannot deduct personal, living or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts, and then deduct the business part.

An example: You borrow money and use 70% of it for business and the other 30% for a family vacation. You can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and isn’t deductible.

Let’s look at business use of your car and your home:

  • Business use of your car: If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.
  • Business use of your home: If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses include mortgage interest, insurance, utilities, repairs and depreciation.

Other types of business expenses? Let’s take a closer look:

  • Employees’ pay: You can generally deduct the pay you give your employees for the services they perform for your business.
    Retirement plans: These are savings plans that offer you tax advantages to set aside money for your own, and your employees’, retirements.
  • Rent expense: Rent is any amount you pay for the use of property you don’t own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
  • Interest: Business interest expense is an amount charged for the use of money you borrowed for business activities.
    Taxes: You can deduct various federal, state, local and foreign taxes directly attributable to your trade or business as business expenses.
  • Insurance: Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business or profession.

This list is not inclusive but endeavors to offer some common business expenses and explains what is and isn’t deductible. Of course, in some cases, expenses might need to be amortized — deducted over a period of several years — if they are startup costs or if they’re related to the purchase of business equipment.

You must capitalize, rather than deduct, some costs that are part of your investment in your business — these are called capital expenses. Capital expenses are considered assets in your business.

Of course, some business deductions can be very complex, so professional advice is necessary to make sure you’re getting what you’re owed without raising any red flags with the IRS. We’re here to help you with your business tax needs.

Filed Under: accounting, entrepreneur, small business, taxes, Uncategorized Tagged With: business, business taxes, small business, tax deductions, tax planning, taxes

The CARES Act: How it can impact your small business!

April 3, 2020 by Heyward CPA

Filed Under: podcast, small business Tagged With: CARES, covid19, small business

The Financial Flipside Podcast, Episode 16: Year-End Money Moves

December 19, 2018 by Heyward CPA

a hand writes a list with check boxes in a graph-ruled notebook

As the year draws to a close, a lot of us carving out time between holiday parties and wrapping up projects to make a few New Year’s resolutions. After writing or typing out our lists, we roar into the new year with the best of intentions, armed with gym memberships, apps, and new gadgets. Yet, by the end of 2019, more than 90% of us will have abandoned our resolutio until December, when the whole cycle starts again. In this habit-forming episode, we talk about goal setting: why we succeed, why we fail, and some strategies for making your 2019 resolutions ones we’ll keep. Because we’re a money and finance podcast, and because financial resolutions are incredibly common (one poll taken at the beginning of the year found that saving money was tied with diet and exercise changes for the most popular resolution), we also discuss some things to do to get your finances ready for 2019.

Not subscribed yet? You can do so on Apple Podcasts, Google Play, and Stitcher. Our previous episodes can be found here. If you want to talk to us about habits,  resolutions, or your financial goals for 2019. we’re @financialflipside on Facebook, Twitter, and Instagram.

 

Mentioned on the show:

[Read more…] about The Financial Flipside Podcast, Episode 16: Year-End Money Moves

Filed Under: podcast Tagged With: goal setting, money, new year's resolutions, personal finance, small business, tax planning, taxes

An S Corporation Loss Equals a Personal Tax Deduction

November 29, 2018 by Heyward CPA

Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside — the corporate loss may give rise to a personal tax deduction.

Standing between an S shareholder and the loss deduction is a tricky tax computation known as “adjusted basis.” Under the tax law, a shareholder’s loss deduction is limited to the shareholder’s adjusted basis in his/her corporate stock and in any debt the company owes the shareholder.

What is adjusted basis, anyway? Essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss.

If a net operating loss is anticipated for the year, S shareholders should find out whether they will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end. When you give us a call today, our tax professionals can offer guidance so that the transaction will pass IRS muster.

Filed Under: Uncategorized Tagged With: s corporation, small business, taxes

The Financial Flipside Podcast, Episode 15: Flat Hierarchy and Luxury Couches: Startups and Startup Culture

November 8, 2018 by Heyward CPA

Facebook, Twitter, Airbnb, and Lyft all began life as startups, and their success has meant that the romance of rapid growth and multi-million dollar exits has permeated not only the world of business but almost every aspect of our daily lives. Popular business magazines draw readers in with breathless company profiles and promises that the morning routine or management style of this or that founder could transform your business too. Away from the office, television shows like Silicon Valley and Shark Tank have turned coding marathons and venture capital pitches into appointment viewing.

Where does our collective fascination leave businesses that don’t follow the startup model? Is there any real difference between startups and small businesses? What can startups and small business learn from each other? These are just some of the questions we tackle in this episode. Enjoy!

As always, we want to hear from you: tell us about your startup dreams, adventures in building a strong business culture, or even your favorite (or least favorite) entrepreneurship-entertainment. We’re on Instagram, Twitter, and Facebook @financeflipside, or you can email us at [email protected]

Mentioned on the show:

Growly.io’s history of startups
Are you running a startup or a small business? What’s the difference?
When does a business stop being a startup?
Homogeneity and diversity in tech startups
Flat vs. hierarchical business structures
5 startup founders discuss company culture
The myth of flat hierarchy in startups (opinion)
Do You Know Where Your Money Is? 3 Tips to Get Your Startup’s Finances in Order
Accounting 101 for Startups
5 reasons why small business owners shouldn’t ignore marketing
101 ways to market your small business and 40 more ideas for small businesses on a budget.
Startup writer and entrepreneur John Westerberg argues that most entrepreneurs should focus on building small businesses instead of startups

Filed Under: Uncategorized Tagged With: entrepreneurship, innovation, small business

Have an S Corporation? Be sure to Give Yourself a Paycheck

October 10, 2018 by Heyward CPA

If your company is organized as an S corporation, you may wonder whether it is better to take income from the company as salary or as cash distributions. Of the two options, distributions carry the least tax cost because they are not subject to employment taxes. But that doesn’t mean you shouldn’t take a paycheck from your firm.

IRS Warning

Over the years, the IRS has made a point of warning S corporations not to attempt to avoid federal employment taxes by having corporate officer/shareholders treat their compensation as cash distributions, payments of personal expenses, or loans instead of as wages. According to the IRS, distributions must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.

What Is a “Reasonable” Salary?

To avoid problems with the IRS, you should be sure to take a reasonable amount of salary if you receive any direct or indirect payments from your company. However, the tax law has no hard-and-fast guidelines regarding what is considered “reasonable.” When the issue has come up in court, the determination has been based on the facts and circumstances of the particular case. Various factors have come into play, including:

* Duties and responsibilities
* Time and effort devoted to the business
* Training and experience
* What comparable businesses pay for similar services
* Timing and manner of paying bonuses to key people
* Payments to employees who are not shareholders
* The corporation’s dividend-paying history
* Compensation agreements
* The use of a formula to determine compensation

An Exception

What about an S corporation officer who doesn’t perform any services for the corporation — or whose services are very minor? In this relatively unusual situation, assuming the officer receives no direct or indirect pay, he or she would not be considered an employee.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Filed Under: Uncategorized Tagged With: compensation, entrepreneur, salary, small business, taxes

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