By Mark T. Winsor, CPA

Auto – I have found the using the IRS approved mileage rate may be better than actual expenses. You must track your business miles anyway, since only that percentage of auto use is deductible, if you use actual expenses. For 2023 the IRS rate is 65.5 cents per mile, so if you drive 500 miles per month for business, that would be a deduction of $327.50, or you can reimburse yourself that much from your business, which is tax free, since the IRS allows it a deduction, with no other documentation. If you use actual expenses, you must prorate actual expenses based on percentage of business mileage versus personal miles. With the deduction of actual expenses, you can depreciate your vehicle, but that is limited to the cost of an average vehicle.

Telephone - The IRS does not allow deduction of the cost of a home phone but does allow the deduction of the cost of your cell phone. If your spouse is an officer or a participant in your business, the cost of their cell phone would also be deductible. If you have a family plan, you may have to exclude the prorata cost of family members not involved in the business.

Internet – If you work from a home office, you can deduct a portion of your internet cost. You would want to gauge the amount of time that it is used for business, versus the time that is used personally and deduct that portion. Many times, half of the cost may be deductible.

Bank Charges – If you use a separate bank account for business, you can deduct the bank charges. I recommend that you use a separate bank account anyway, since the IRS would be more likely to disallow expenses if business and personal expenses are mingled together.

Insurance – If you have Error & Omissions or Liability Insurance & maybe an umbrella policy those premiums would be deductible.

Retirement contributions – “Pay yourself first”. I encourage my clients to set aside money in IRA, SEP, SIMPLE or 401(k) accounts. Which one that you decide to use will depend on how much you are able to set aside. If $6,500 to $7,500 or less is the amount that you can allow from your budget, then you would want to use an IRA account. You can contribute around 20% of your net business income to an SEP account, so that can be as high as $53,000, but you do have to cover any employees at the same level. A SIMPLE plan lets each employee decide how much they want to set aside, with a small amount of match from the employer. A 401(k) has higher limits, but also very high administrative costs, so many small businesses don’t use those. However, if you are the only employee or a sole proprietor, an Individual 401(k) can be advantageous.

Uniforms – Generally, the cost of acquiring and maintaining a uniform is a deductible business expense. You cannot use routine street clothing as a uniform, but if you have your business name and/or logo printed on your clothing, it is then considered a uniform.

Year-End Tax Planning – Close to the end of the year, you can speed up deductions and defer income to shift taxable income to the next year. If you are completing a job in December, you can wait to finish it and bill for it in January. If you are anticipating a business trip in January or February, you can buy and pay for air travel and some of the expenses in the current year.

It is good to evaluate your projected tax liability during December and then pay yourself a bonus, with enough federal and state withholding to cover that liability in an end of the year paycheck, to avoid any underpayment penalties.

Choice of Entity – There are advantages and disadvantages depending on the choice of business entity that you use to conduct business.

With a sole proprietorship or partnership all the net income is subject to self-employment tax. At a net income of $20,000 the self-employment tax would be $3,060. Using a home office can be deductible for a sole proprietorship. You can also pay your children for services they perform, without having to incur payroll taxes on their wages.

A regular corporation has more deductions available but is subject to double taxation. The company pays tax at a rate of 21% on its net income and if you then pay yourself dividends, that is taxed again on your individual income tax return.

With an S corporation you must take a reasonable salary, but money reinvested into the company is not subject to self-employment tax and avoids double taxation. You can take distribution of profit, over and above your salary, without incurring the payroll tax on that portion of income.

If you use an LLC (limited liability company), it could be taxed like any of the above entities. This form of organization is just simpler to administer. There is no requirement for annual shareholder meetings. It is the preferred method of operating rental real estate.

Speaking of the annual shareholder meeting, that can be an advantage. You don’t have to conduct your annual meeting in your usual business location. For example, it could be held at a ski resort, beach location or on a cruise. The expenses would not be deductible if held outside the United States.

I think that the Office in Home deduction is overrated. There is some benefit for sole proprietors, but it is not allowed for corporate entities. It is limited to the percentage of the house that is used exclusively for business. So, if a 10 X 10 spare bedroom is used as the office in a 2,000 square foot house, that works out to 5% of the home’s expenses that can be deducted. You can use a number of expenses as deductions, such as depreciation, mortgage interest, real estate taxes, insurance, repairs and utilities (electric, gas, water and trash pickup). Also, it is limited to the amount of income generated by the business, so if you have a loss, you would not be able to use the Office in Home deduction.

There can be a number of other deductible expenses, depending on the nature of the business. Generally, anything that improves the business or facilitates you producing more income can be used