If you are a sole-proprietor and you own the building where your business is located, consider gifting the building to your spouse while keeping the business in your name. This allows you to pay your spouse rent that can be deducted from your business profit in order to save self-employment tax on your business profit.
The commercial building that you purchase for your business is generally depreciable over 39 years…but anything not permanently affixed to the structure or land is depreciable over 1, 5, 7, or 15 years. In the year you purchase the building, make sure to assign a value to anything that is not structural so that you can expense that value more quickly. This savings-idea applies to rentals as well.
You can deduct the full cost of your cell phone (even though you have some personal use) as a working condition fringe benefit. Don’t forget to deduct your home internet as well. You can take these deductions even if you don’t maintain a home office.
If you plan to convert your personal residence into a rental property, consider first selling the home to your S Corporation. You can avoid taxes on the sale with the home-sale exclusion of up to $500,000 and potentially increase the rental property’s depreciable basis, which provides for a greater depreciation deduction over the life of the rental. If you don’t sell the home to your S Corporation and instead just convert it from personal to rental-use, then you will lose the $500,000 home-sale exclusion if you rent it for more than 3 years, and you can only depreciate the historical cost of the home rather than the higher fair market value of the home.
You can take the home office deduction if you have an area of your home that is used exclusively for your business, as long as other supporting tests are met. The home office deduction is only about $1,500…that isn’t a big deal. The big deal is that the presence of the home office means that you no longer have non-deducible commuting expenses…meaning, you can now deduct the cost to get back and forth from your home to your main office. In addition, you can directly deduct any improvements you make to that space – so if you install new blinds in that office, you can deduct the blinds, or if you install a new floor in that space, you can deduct the new floor.
If you rent that home to others, then make sure that you spend no more than 14 days on the property for personal reasons (days spent on repair, furnishing, management, or upkeep don’t count as personal as long as you spend 4 hours and 1 minute during the day on repair, furnishing, management, or upkeep) so that you can deduct 100% of the expenses of that home.
If you live in the home (i.e., have more than 14 days of personal use of the home), then make sure that you conduct business for your small business in that location. That makes your home and travel to the home an ordinary and necessary business expense which might be deductible.
You can deduct travel if the primary purpose of the travel is business-related. Example: Small-business owners go to Hilton Head to work on business plans and review business reports because the location was “appropriate and helpful” in accomplishing that work. As long as 4 hours and 1 minute of each week-day is business-related, then the entire cost of the trip can be deducted to some degree. …and, if you conduct business on Friday and Monday, then the sandwiched-weekend does not need to be business-related in order to deduct weekend lodging and meals.
Other potentially-deductible business-related travel: Travel and visit a customer or prospect each day of the trip to deduct that day’s travel expenses. Or you can spy on a competitor, study architecture of the city for an upcoming office remodel, sample food of the destination-city if you are in the food business, attend a convention or seminar, or cruise to Europe to attend a seminar or visit a client.
If you purchased a desk for personal purposes and then started using it in your business, you can start depreciating the value of that desk. Identify any personal assets that are now used for your business to gain a depreciation deduction on that asset: desk, cell phone, printer, trailer, computer, supplies, equipment, etc.
You can choose to take money from your S Corporation in 2 ways…as a wage and as a draw (i.e. return on equity). You pay 14% more tax when you take the money as a wage because Social Security and Medicare taxes must be paid on a wage, while money taken as a draw is free from this 14% tax. The IRS requires you to take a “reasonable wage” from your S Corporation if your S Corporation is sufficiently profitable. You should aim to set your S Corporation wage on the low end of “reasonable” in order to minimize this 14% tax.
You cannot deduct clothing costs if that clothing is “adaptable to street-wear”. There is an exception to this rule for any clothing with your business logo on it. So, if you want to buy a $300 coat and expense it, then simply put your business logo on it.
The same rules apply for a motor homes, trailers, lawn mowers, etc that you use 100% for business use in the year of purchase even though you may not use that asset again for business after the year of purchase.
If you buy a new or used truck or SUV at the end of the year and claim 100% business-use (by, for example, purchasing it on December 31st and driving it from the dealership to Office Depot to purchase paper for your business and then leaving it in the Office Depot parking lot until January 1st), then you can write off 100% of the cost of the vehicle in the year that you buy it even though you are likely never going to use that vehicle very often for business again. If you buy the same vehicle mid-year and use it 5% for your business, then your deduction would be 5% of the cost of the vehicle. This strategy works best if the vehicle is titled in the name of the business, but that isn’t absolutely necessary.
In general, you can deduct 50% of meals and 0% of entertainment. There are various exceptions to this, such as:
a. You can deduct 100% of the office holiday party or picnic
b. You can deduct 100% of the transportation to the entertainment event or meal
c. You can deduct 100% of the food offered to the public for free (e.g. seminar, open house)
You can deduct up to $25 in gifts paid to an individual per year. Thus, if you give a client a $50 Starbucks gift card, you can deduct $25 of that gift. How to get around this? Give a gift of $25 to the client and a gift of $25 to that client’s spouse and deduct $50 in total instead of just $25.
Assume that you are in the 24% Federal tax bracket (you would be if you had taxable income above $165K if married-filing-jointly). If your small-business employs your child and pays that child $10K, then you get to deduct $10K at 24% and the child pays tax on that $10K at a 0% Federal tax rate. Your only cost is the 14% FICA tax paid on that wage if you are an S Corp. If you are a partnership or sole-proprietor, then you don’t have to pay FICA tax when you employ your children. Takeaway: Hire your child and save 10% if you are an S Corp and 24% (plus maybe another 14% SE tax) if you are a partnership or sole-proprietor on whatever you pay that child. In addition, the wage that you pay the child gives the child earned income which allows him or her to make a Roth IRA contribution. This strategy would also work if your children help in your rental business (i.e., mow the lawn).