Introduction

1. Tax Deduction Basics

• How Tax Deductions Work
• How Businesses Are Taxed
• The Value of a Tax Deduction
• What Businesses Can Deduct
• Businesses That Lose Money

2. Are You Really in Business?

• What Is a Business?
• Tax Consequences of Being a Hobbyist

3. Start-Up Expenses

• What Are Start-Up Expenses?
• Starting a New Business
• Buying an Existing Business
• Expanding an Existing Business
• When Does a Business Begin?
• Claiming the Deduction
• If Your Business Doesn’t Last 15 Years
• Organizational Expenses

4. Business Operating Expenses

• Requirements for Deducting Operating Expenses
• Operating Expenses That Are Not Deductible
• Operating Expenses Paid With Paycheck Protection Program Loans
• Tax Reporting

5. Deducting Long-Term Assets

• What Is a Long-Term Asset?
• Deducting Inexpensive Property: The De Minimis Safe Harbor and Materials and Supplies Deduction
• Deducting Long-Term Personal Property: Bonus Depreciation, Section 179, Regular Depreciation
• Bonus Depreciation
• Section 179 Expensing
• Deducting Repairs and Improvements
• Regular Depreciation
• Deducting Real Property
• Intangible Assets
• Tax Reporting and Record Keeping
• Leasing Long-Term Assets

6. Inventory

• What Is Inventory?
• Deducting Inventory Costs

7. Office Expenses

• Qualifying for the Home Office Deduction
• Corporation Employees
• Calculating the Home Office Deduction
• Simplified Home Office Deduction Method
• IRS Reporting Requirements
• Deducting an Outside Office or Workplace

8. Car and Local Travel Expenses

• Deductible Local Transportation Expenses
• The Standard Mileage Rate
• The Actual Expense Method
• Other Local Transportation Expenses
• When Clients or Customers Reimburse You
• Reporting Transportation Expenses on Schedule C
• Corporations, LLCs, and Partnerships

9. Business Travel

• What Is Business Travel?
• What Travel Expenses Are Deductible
• How Much You Can Deduct
• Maximizing Your Business Travel Deductions
• How to Deduct Travel Expenses
• Travel Expenses Reimbursed by Clients or Customers

10. The Pass-Through Tax Deduction

• You Must Have a Pass-Through Business
• You Must Have Qualified Business Income
• You Must Have Taxable Income
• Deduction for Taxable Income Up to $164,900 ($329,800 if Married)
• Deduction for Income Above $164,900 ($329,800 if Married)
• Taking the Pass-Through Deduction
• Strategies to Maximize the Pass-Through Deduction

11. Hiring Workers

• Employees Versus Independent Contractors
• Tax Deductions and Credits for Employee Pay and Benefits
• Reimbursing Employees for Business-Related Expenditures
• Employing Your Family or Yourself
• Tax Deductions When You Hire Independent Contractors

12. Retirement Deductions

• Why You Need a Retirement Plan (or Plans)
• Employer IRAs
• Keogh Plans
• Solo 401(k) Plans

13. Medical Expenses

• The Affordable Care Act (ACA)
• The Personal Deduction for Medical Expenses
• Deducting Health Insurance Costs
• Sick and Family Leave Tax Credits for the Self-Employed
• Tax Credits for Employee Health Insurance
• Adopting a Health Reimbursement Arrangement
• Health Savings Accounts

14. Additional Deductions

• Advertising
• Business
• Bad Debts
• Casualty Losses
• Charitable Contributions
• Clothing
• Dues and Subscriptions
• Education Expenses
• Entertainment and Meals
• Gifts
• Insurance for Your Business
• Interest on Business Loans
• Legal and Professional Services
• Taxes and Licenses

15. Record Keeping and Accounting

• What Records Do You Need?
• Records Required for Specific Expenses
• How Long to Keep Records
• What If You Don’t Have Proper Tax Records?
• Accounting Methods

16. Staying Out of Trouble With the IRS

• What Every Business Owner Needs to Know About the IRS
• Eight Tips for Avoiding an Audit

Index

Introduction

Few of us ever test our powers of deduction, except when filling out an income tax form.—Laurence J. Peter

If you are truly serious about preparing your child for the future, don’t teach him to subtract—teach him to deduct.—Fran Lebowitz

The goal of this book is to help you, the small business owner, pay less federal tax so you can keep more of your hard-earned dollars. The trick to paying lower taxes is to take advantage of every tax deduction available to you. A potentially huge array of deductions is available to businesses of all sizes, but you need to know they exist and understand how to use them.

Remember, the IRS will never complain if you don’t take all the deductions you are entitled to. In fact, the majority of small businesses miss out on many deductions every year simply because they don’t know about them—or because they neglect to keep the records necessary to back them up.

That’s where this book comes in. We explain all the most valuable business deductions and show you how to deduct all or most of your business expenses. Learn how to take and properly document your travel, home office and operating expenses, depreciation, and other deductions. Even if you work with an accountant or another tax professional, you need to understand business deductions. With this book, you will learn how to keep better records, ask better questions, obtain better advice and—just as important—evaluate any information you get from tax professionals, websites, and other sources. If you do your taxes yourself, your need for knowledge is even greater. This book can be your guide—providing you with practical advice and information you need to rest assured that you are not missing out on valuable deductions.

Now more than ever, you’ll need guidance when it comes to under- standing your taxes. In 2017, Congress enacted the most sweeping changes to the tax code in over 30 years when it passed the Tax Cuts and Jobs Act (TCJA), which took effect in 2018. Now, in an effort to stave off economic devastation in the wake of the coronavirus (COVID-19) pandemic, Congress has revised the nation’s tax laws yet again, temporarily suspending many of the harshest provisions of the TCJA. We explain how these changes affect small business deductions including:

• tax treatment of the hugely popular Paycheck Protection Program (PPP) loans
• new rules for deducting net operating losses (see Chapter 1)
• changes to bonus and regular depreciation for improvements to nonresidential real property (see Chapter 5)
• new tax credits for employers who retain their payrolls and provide sick leave and family leave (see Chapter 11)
• new tax credits for self-employed business owners impacted by the COVID-19 pandemic (see Chapter 13)
• how employers can deduct pandemic-related payments to employees (see Chapter 11)
• temporary rules allowing penalty-free withdrawals from retirement accounts (see Chapter 12)
• rules for deducting business-related meals (see Chapter 14), and
• changes affecting charitable contributions by businesses (see Chapter 14).

This book is for anyone who owns a business, including self-employed businesspeople; sole proprietors; professionals who own their own practices; those engaged in part-time or sideline businesses; consultants, freelancers, and independent contractors; owner-employees of small corporations; partners in business partnerships; and members of limited liability companies. If you’re an employee of a business you don’t own, this book doesn’t cover your situation. Nor is this book a tax preparation guide—it doesn’t show you how to fill out your tax forms.

By the time you do your taxes, it might be too late to take deductions you could have claimed if you had planned the prior year’s business spending wisely and kept proper records. To avoid this fate, you can (and should) use this book all year long to make April 15 as painless as possible.

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