Happy New Year! As we wrap up 2014 and turn our attention to 2015, it seems there is no time like the present to set yourself up for success when it comes to keeping the IRS away. I often see small businesses make mistakes when it comes to their recordkeeping; mistakes that you can easily avoid and ones that can raise a red flag to the IRS. To help you avoid these potentially nerve racking mistakes, I’ve provided tips and tools to keep you on the right side of the IRS.
The IRS does not require receipts for meal and entertainment expenses of less than $75, and it may seem like a pain to keep track of every little dinner, but I recommend that you do. The good news, there are now many tools to help recordkeeping easier. Credit card receipts are excellent for record keeping since they have all the expense information required. You’ll just need to make a notation so you can include the purpose of the event, the individual you were with, and your business relationship with that person. There are many Apps out there to help record and organize receipts. If you haven’t already found one, you might want to look at Expensify, BizXpense Tracker, Smart Receipts or Concur.
Small businesses use either the actual expense method or the optional mileage method of deducting the business use of a vehicle. If you are new to small business ownership, you need to be certain to account for any personal use of the vehicles, including commuting. If you choose to use the actual expenses method, divide business miles driven by total miles driven to determine the percentage of business use. Then multiply total expenditures by the percentage of business use to calculate the deductible business portion. When using the optional mileage method, multiply the business miles driven by 56 cents (the IRS published standard mileage rate for 2014). Again, there are many App options to help when it comes to tracking mileage and deductions. A couple of apps that keep coming to the top of the list are Mileagelog+, Expensify, and BizXpense Tracker.
The IRS only allows a deduction of up to $25 per individual per year. Remember it is the thought that counts! If you want to claim the deduction, make sure you keep a copy of the purchase receipt. Including the record of the business purpose for making the gift or the benefit, you expect to receive, as well as the name of the recipient, his/her occupation or title, or some other designation that will establish your business relationship to the individual.
If you consider the material as a capital expenditure, try depreciating it.It is best practice to separate material from suppliers in your bookkeeping and accounting. That is true even when you elect to expense equipment purchases under Sec. 179. If you do not report the purchases, the IRS could rule that the cost was improperly characterized and deny the deduction.
Ordinary and Necessary
A good practice to help in determining the deductibility of expenses is to apply the common and needed rule, to be demonstrable, an expense must be ordinary and necessary. An expense is “ordinary” if it is customary and conventional for the taxpayer’s line of business. A “necessary” expense is helpful in the taxpayer’s business, but it need not be indispensable.
Meals and Lodging
When traveling for business, lodging is 100% deductible, but the away-from-home meals deduction is limited to 50% of the cost. To help make record keeping easy, make sure to record meal expenses and lodging expenses separately. Pay particular attention when they are charging meals to your room. In these instances, it is advisable to have your hotel and credit card statements display the costs separately.
Entertainment at Sports Events and Theaters
When entertaining customers at sporting events and theaters, the deduction is limited to 50% of the face value of the ticket. The cost of the entertainment must be “directly related to” or “associated with” business or the production of income.
Home Office Deductions to put IRS away
There are two methods for deducting the business use of a home. The first method is prorating the expenses (with some limitations) of the home by multiplying the allowable costs times the business use square footage divided by the total square footage of the home. The second method, referred to as the simplified method, allows $5 per square foot deduction (maximum 300 square feet) without having to keep records of expenses. Both approaches have the same eligibility requirements.
Every business is unique, so if you need assistance in setting up your recordkeeping system or require further clarification on any of the topics discussed, please give me a call.