S6E5: Tax Time - Unlocking Deductions for Small Business Owners

Disclaimer: The information in this video should not be viewed and is not intended as tax/financial advice. Consult with an expert before making any decisions regarding your finances. 

Tax season’s coming—are you leaving money on the table? We’re breaking down the must-know deductions for small business owners, from office supplies to home offices, travel, and even client gifts. Plus, the common tax traps you don’t want to fall into.

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Transcript

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So wherever your space is, be it 40 square feet or 100 square feet or 500 square feet, it's as long as you're using it just for business, that's that can count. And the cool thing about this on a risk reward basis is the reward here is that if you have this area that you work in exclusively, then any you want, the big number you want to get is the percentage that that square footage is of your whole home. So say my whole home. I'm making this up, but it's a studio apartment and it's what, a thousand square feet? I don't know if that's how big a studio apartment is. And say my workspace is 100 square feet, then I can take one tenth of everything I spend to keep that apartment up and running. Utilities, the rent bill itself. Hey, welcome back to the Cash Flow Podcast. This week we are going to focus on the topic that's on most everybody's mind right now, which is taxes. Between now and April 15th. We know we have all of this going on and you're probably got a lot of questions in your head whether you use a tax accountant or you use one of the softwares that's out there for you. I want to make sure that if you're self employed or you have an LLC and you're running a small business, that you make sure you go ahead and get all the deductions you can possibly get. So we're going to cover a few of the deductions that are common, but also a couple of the mistakes people make with these and talk a little bit about the risk reward around some of it. So I'm going to preface this all by saying this is not tax advice. Any tax decisions you make should be covered or discussed with your own professional tax accountant, cpa, whoever it is you do the work with or the advice of whatever software you're using. So just be aware of that. This is just some thinking that I have. The facts about the deductions are accurate and then some of the things I might say about risk and reward are just a little bit of opinion and opinions about the decisions you can make based on your risk tolerance around these items. So let's hop in. What are the most common deductions that you want to make sure you actually get credit for automatically? Anything that you spend directly on your business is a business deduction. And by that I'm talking about the basics, like if you pay contractors out of your business, if you buy supplies for your business, if you have software that's for your business, anything like that, automatically deductible. So we'll talk about how and why you can keep track of that, but all 100% deductible. But let's start with what does deductible mean? So pretty much what the IRS is going to do, regardless of how your business is structured, is tax you on your revenue. Okay? So you make a certain amount of money from other people and boom, that becomes tax eligible the minute you make that money. But what they also allow and what makes this kind of better is that before they go, okay, I'm going to tax that, they let you deduct a number of expenses from that number. So subtract them from that number. So just as a quick example here, If I make $100,000 this year and I have $80,000 of all these expenses we're going to talk about, then I'm only going to get taxed on that last 20%, which is net income in my business. So when we say deduction, all we mean is it's something we deduct from revenue before the IRS can tax us on a final number. So let's start with the first few. If I have, like I said, office expenses, supplies, equipment. My friend behind the camera here owns a audio visual company. So their camera equipment, all of their production equipment, that's all deductible. So those are pretty straightforward and easy. But one that a lot of people overlook is the home office. Now, the couple little rules around here for the home office are not too bad, but pretty much it has to be used exclusively for business. So wherever your space is, be it 40 square feet or 100 square feet or 500 square feet, it's as long as you're using it just for business, that can count. And the cool thing about this on a risk reward basis is the reward here is that if you have this area that you work in exclusively, then any you want to, the big number you want to get is the percentage that that square footage is of your whole home. So say my whole home, I'm making this up, but it's a studio apartment and it's what, a thousand square feet? I don't know if that's how big a studio apartment is. And say my workspace is 100 square feet, then I can take one tenth of everything I spend to keep that apartment up and running. Utilities, the rent bill itself, any maintenance I have to do to it, and I can take 10% of that because my 100 square feet is 10% of the thousand feet that are there and I can deduct that. So if my utility bill is $300 a month, I can deduct $30 a month from my business so that I get taxed less in the end. So that's one thing. Home office space is often, often overlooked. Business meals. So if I take my producer out to lunch and we're talking business, I can keep the receipt for that lunch and I can deduct the cost of that lunch from my business. Now, anymore, it's been up and down and all over the place, but right now it's a 50% deduction. So if I spend what, $28 on us at McDonald's, I can deduct half of that. Couple things about that one, though, and what gets people in trouble. One is that whenever you do a meal like that, and it's a business meal where you're taking somebody else out, then you need to make sure that you have a receipt number one. And that on that receipt you write who you took, why you, and what basically what the business topic of the lunch was. Okay, so I would take. I would take Francis out to lunch and I would charge. Actually, he charged. He charged off on his card and he'd say Pam Pryor and filming was the topic. And that's all you need to do. You need to just have and keep that receipt. So you need to be able to prove business was discussed, but if it was, you get to count it. Now, I'm going to talk about some stretch interpretations of these at the end, but again, this is not advice. This is just things for you to think about in your risk reward area. So the next one is travel. Any travel you do that is strictly for business. Absolutely deductible. If you attend a conference, if you go to a training course that's relevant to your business, if you have to travel to film something or to see a client or whatever it might be, travel is deductible. That includes airfare, the meals while you're on the road, hotel, ground transportation, anything else related to that travel, 100% deductible. Now, what often comes up here is people will take a trip with their family, say to Hawaii, and will say to me, hey, is that deductible? Now, here is one of those things where this is not tax advice. This is just telling you, here's some couple things you could think about while you're in Hawaii. Are you having somebody take some portraits of you for business in great scenery. Are you meeting with people who may know a little bit about your Discipline and learning some more stuff. Are you building relationships that are relevant to your business? Think about what you might be doing on that trip that is mostly vacation, that might be related to business and have a business aspect to it. And then you can decide whether that's partially a business trip or not. And of course, you couldn't deduct the airfare for your husband or your wife and the kids, but certainly if it's a business trip, you would be able to deduct the airfare for you. And if a meal were a business meal, you'd be able to deduct your business meal as an expense. So the risk in this or not the risk. The way you want to think about this is some people really want to document very clearly what the conversation was, who it was, and, you know, make absolutely sure it's all tied down in a knot. And others get very general with this. Now, if you're audited and you have been very general with this, it's highly likely that that might get denied. And then you might have penalties on some of that expense. So just know that, like, think about it very clearly, document it in your head very well. Have a very good reason for it to be a business trip. And some of those expenses might be deductible for you. So that's a little travel piece of information just for you to consider. Again, not advice. Another one that people always ask about is my car. Can I deduct my car? Can I deduct my car? The answer is yes. But here's the thing about your car. If your car is used 100% for the business, like it's a dump truck and you are a junk clearing business, then absolutely that truck should be purchased by the business, depreciated in the business, and count all of the expenses related to it count as deductions in the business. But for most of us who are coaches or CFOs or whatever it is that we do, we drive to the airport, we drive to our clients, we do trips to go take photo shoots, we do trips to go get office supplies. We may drive anywhere for business. So anytime I'm in my own car, the question is, how do I deduct that cost of maintenance and repair if it's a personal car? So here's the thing. If you have a car, and again, not advice, just the way I think about it, if you have a car and it's used primarily for personal use, then you would keep it as a personal car, you'd pay for it as a personal car. All of those things and keep track of its mileage. Okay? And when you keep track of its mileage, that means you have to know how many miles you used that car for business. And truthfully, to be able to do this legitimately, you need to keep a log. But take heart, and I've done this on my podcast before. There is an app that is a godsend for this and so freaking easy. And it's called Mile iq. I'm not sponsored by them at all, but we can drop the link down here for you. I don't even have an affiliate link, but it's a great tool. And essentially, if you set it in the background to always be able to do location, then every time you get in a moving vehicle, it keeps track of where you left and where you went, and it counts it as a trip. And what will happen at the end of the day, at the end of the week. Don't go longer than that. It's a real pain in the butt if you drive a lot, but you can. It pulls up each trip and you basically swipe right for personal, you swipe left for business. I may have the rights and lefts backwards, but usually you just swipe through the five trips that week. Boom, boom, boom, boom, boom. And it. You do that all year long, all year long, all year long. And at the very end of the year, when it's time to do your taxes, you push print my business report, and it literally is an IRS ready log. What time of day it was, where you were, where you went, and you can, even if you want to put the business purpose down there for it, that would. This is not business advice. I might consider that to be overkill. Just I just print the report and save it. And it's got my mileage. And here's the thing about mileage. I'm not sure what the exact mileage interest rate is right now because it changes every year. And I just haven't looked at it recently, but it's up over 60 cents, I believe. So think about this. If you drive 1,000 miles for work, if you drive 10,000 miles for work, all of a sudden you get a$600 deduction. If you drive 10,000 miles for work, that's pretty darn good. $6,000 deduction. I don't do math in my head very well. If you drive 100 miles, you have a $60 deduction. If you drive 1,000 miles, you have a$600 deduction. If you drive 10,000 miles, you have a$6,000 deduction. So that's another really good one to be aware of. Now, if you use your car mostly for work, it's okay, you can make it a business car, but you do have to then remove from the deduction any personal miles you use the car for. All right, so you got that. Give and take. For most of us out there in the entrepreneurial world who aren't running businesses that have to own equipment, generally having your personal car and keeping track of the mileage is key. And I'll tell you what, get mile IQ and you'll never consider it a pain in the neck again. Okay, last but not least, and this is something I actually didn't know because I hadn't been doing taxes a lot until this year. I got my cpa. I stay up to date, but I haven't really been looking at the tax news or I'm sorry, the tax laws. You can give client gifts and those are deductible, but actually only up to$25 each. So just be aware of that. If you give your clients, you know, $100 gifts or thousand dollar gifts, truly the only deductible portion for the IRS is 25 bucks. And then finally, I wanted to cover the. Although I can't read it very well because I don't have my glasses on. On. Hang on just a second, we're going to look. Oh, whoa, whoa, whoa, whoa, whoa. If you get health insurance through your company, which you can do if you've got an LLC or if you're self employed, then the premiums that you pay on that health insurance is also deductible. So there we've just touched on a few of the deductions that are out there and available to people, how they can be used properly and some of the options for interpreting that. That properness. Wrong word. Property. No, you don't. You get the point. And hopefully that gives you a little bit of a heads up on a good ways to reduce the amount of income that your business is going to be taxed on. That's it for this week. It's tax time right now. So I figured I'd throw in a tax podcast. I hope you all have a great week. Drop a like subscribe wherever you're listening to this please and comment anywhere. Tell us other topics you'd like to hear about that are relevant for you. We always will give it to you in short, actionable advice. And here on the Cash Flow podcast, we're doing this for you entrepreneurs. So you have a great week and we'll be back.