A small business owner’s main goal at tax time is to maximize deductions and minimize tax liabilities. This process often comes with many technical questions. Where do personal and business expenses intersect and diverge? What is legal and what will be flagged? The answers are not always cut and dry. Requirements change from year to year. Regulations differ from state to state and city to city.
To help clarify some of the concerns business owners encounter, we are answering some of the most common tax questions from small businesses to their tax professionals. Naturally, situations get more complex depending on the size of the company, but these general rules will help guide you towards reducing your taxes.
Small business tax FAQ
Q: How often do I need to pay income taxes for my new business?
A: If you were previously employed, you are probably familiar with filing an annual tax return. The payments you made toward the taxes you owed were deducted each pay period and paid by the employer quarterly. The federal income tax system is a pay-as-you-go system, so you should expect to make quarterly estimated tax payments based on your earnings and receipts. These installment payments will then offset your tax bill when you file your annual return.
Q: Do I need to keep receipts if I pay for things with the business account?
A: You may use different types of documentation beyond paper receipts for certain expenses. Bank statement line items are usually sufficient for gasoline purchases and software subscriptions, for example. For fixed assets, travel expenses and items purchased for the purpose of making your products (i.e., your Cost of Goods sold), you will want to be more diligent in keeping receipts and indicating how the items or services were used in your business.
Keeping paper copies is not necessary. You can use an app or your phone’s camera to keep a record of each receipt, then destroy the original copy if you prefer. The IRS rules about records and specific travel, meals and entertainment expenses can seem unwieldy, but business owners often find that if they aren’t carefully tracking their receipts, they miss potential deductions.
Q: Is my gym membership a personal or business expense?
A: It’s a personal expense; however, if you create a private gym within your business location that is open to all employees (and not to the public), the expenses for the facility may be tax deductible.
Q: Can I take a deduction for my home office when it’s part of my dining room?
A: Yes, you usually can take a home office deduction if you have converted part of your home and use it regularly and exclusively for managing your business. The same can be true if the location is in a barn, garage or studio, regardless of whether you own or rent your home.
There are two calculation methods available:
- Using a standard $5 per square foot amount
- Using your actual expenses
Q: I have a car that I use for business, but the car loan is in my personal name. I’ve been paying the loan from the business account. Can I continue to pay the personal loan from the business account?
A: The car loan should be in the name that matches the account from where it’s paid. In this case, put both the car loan and payments under your business name. If you keep the loan under your own name, you should pay it from your personal account and then deduct mileage and other auto expenses on your personal return for business use.
Q: Are leasing trucks, cars and materials specifically for jobs tax deductible?
A: Yes, these are tax-deductible. Review our Lease Accounting (ASC 842) guide if you need more information about how to properly record leases for your business.
Q: Can I write off meals for anyone I take to dinner if we talk about business? What entertainment expenses are allowable?
A: Yes, documented business meals are deductible—but within reason. Meals for business purposes are 50% deductible. Lavish meals that are perceived as entertainment can get your tax return flagged. Entertainment expenses have not been tax deductible since the 2017-2018 Tax Cuts and Jobs Act (TCJA).
Q: Is there a limit for deducting gifts I give to clients? Can it be wine and food, or does it need to be promotional items?
A: There is a $25 limit per gift per person, regardless of the type of product you provide. Sadly, this has been the same amount since 1962 and continually gets overlooked in tax reform updates. You can ignore items that cost $4 or less when determining the $25 limit.
Q: Are public transportation and shared ride services (Lyft, Uber, etc.) used to get to business-related meetings or events tax deductible?
A: Yes, these are tax-deductible.
Q: We spend a lot on parking when on-site with clients. Is it a write-off if we are reimbursed by billing the client on the final invoice?
A: If you pay for parking, then you deduct the parking expense. If you pay for parking, then add it to the invoice for reimbursement, then you must include that as income. The parking income and expense will offset each other.
Q: If I do business while I’m out of town, is the trip a write-off? How much can I write off?
A: You can deduct all travel-related expenses on a trip if the expenses are related to business. For example, if you are on a five-day trip, and you do business on the trip on one day, you can write off one night of the five for lodging. A best practice is to write the reason for the expense on each receipt, including names and topics discussed.
If you find receipt tracking challenging, you can consider using the IRS per diem rate for your destination city. The rates are updated annually each September. If you are at a convention or conference, keep related materials. The IRS may check the nature of conventions and seminars to gain an understanding of whether the trip was relevant to your business.
Q: With regard to clothing, are uniforms or other work clothes deductible? What constitutes a uniform?
A: If a uniform or special work clothes are mandatory on condition of the job and not suitable for everyday wear, you can deduct their cost and upkeep. This can include laundering costs and dry-cleaning expenses.
As a business owner, you can maximize your deductions if the following conditions are also met:
- You provide clothes to your employees that display your company’s logo.
- You provide clothes to your employees that are necessary for their safety.
- You provide clothes to your employees to standardize your branding and appearance.
Q: Are my medications a write-off?
A: Only on your personal tax return. They should not be paid for using the business account.
Q: Can the business pay for my health insurance?
A: Yes. As a general rule, if you offer insurance to one full-time employee, you must provide it for the rest of your full-time employees. The same thing applies with part-time employees.
Also, if your entity is an S-Corp and you are a shareholder of greater than 2% of the S-Corp, then the premiums paid on your behalf will be reported on your W-2 as wages, subject to income tax withholding.
If your business has 25 or fewer full-time employees and meets other criteria, you may also qualify for the Small Business Health Care Tax Credit, which could help offset as much as 50% of your premium cost.
Q: Can the business cover my life insurance policy?
A: Yes, but the premiums are not usually deductible. You may not deduct the cost of premiums for life insurance where you, the business owner, are directly or indirectly the beneficiary.
Q: Can I take a loss on equipment that breaks and is unfixable? What if my work truck is a total loss? How do I handle that?
A: If the equipment is on your fixed asset table and gets depreciated but is now unusable, you can dispose of the asset and take a loss equal to the amount of depreciation that has not been taken.
If you recorded the equipment under Section 179 (of the TCJA), you booked the expense when you purchased it, so you cannot further reduce your taxes with a write-off. The truck follows the same rules. You will still deduct interest payments on the note until you close out the loan with your lender.
Q: How much student loan interest is tax-deductible?
A: Student loan interest is not separately tax-deductible on your business return, but could be an included deduction within your educational assistance program (EAP) if you have one set up. On a personal return, up to $2,500 of student loan interest can be deducted with the amount being phased out depending on your income.
The CAA extended the CARES Act provision to provide tax-free qualified educational assistance through 2025, where employers can provide up to $5,250 annually in tax-free compensation to eligible employees. If an EAP payment is made toward a student loan, the student cannot also take the $2,500 interest deduction made with those funds.
Q: Is there a best practice for setting up a chart of accounts in QuickBooks or Xero?
A: Yes. Ideally, you want to use a four- to six-digit account number. The first number indicates the type of accounts that are within that series. Set incremental number groups up within each type for each sub-category of accounts.
- Assets – 10000 and up
- Liabilities – 20000 and up
- Equity – 30000 and up
- Income – 40000 and up
- Cost of Goods Sold – 50000 and up
- Expenses – 60000 and up
- Misc or Other – 70000 and up
Q: How much miscellaneous income and expense is allowable? I’m asking, because they are each a category in QuickBooks.
A: There is no dollar amount threshold, but generally speaking, try not to use miscellaneous accounts at all unless it is for a truly infrequent and unusual transaction. As a business owner, something categorized as “miscellaneous” does not provide you with information or business insights. Every type of income and expense should have an associated account.
Q: What do I need to consider if I hire my daughter or spouse to help with my family business?
A: Employer obligations outlined by the IRS are dependent on your business structure (sole proprietor, corporation, partnership, or estate). For example, a sole proprietor hiring their child won’t need to deduct social security, Medicare or Federal Unemployment Tax (FUTA) when the child is under 18 years of age. The FUTA exemption continues until they are 21 and also applies to spouses of any age. Naturally, these family members need to be treated like real employees and compensated fairly (and not to excess). And, you need to comply with all labor regulations.
Q: I’m a sole proprietor. If I make a donation to a charity, is it deductible for my business?
A: No, not for your business. Charitable contributions for sole proprietors are deducted on your personal return (Schedule A) rather than your business return (Schedule C).
Getting ready for tax time
If you have a list of tax questions for small business situations, or your tax situation seems to be more complicated than you anticipated, Paro can match you with a vetted tax professional who can review your questions and concerns and guide you toward your tax planning goals.