Today we are going to talk about Deductible Business Expenses. I know, that is a very broad topic, but it is a question that I get asked a lot. Business owners want to know what they can and cannot deduct. You would think the answer is straightforward, but it is not. Therefore today, I am going to cover a few specific deductions that I see a lot of misconception around.
Video Transcript - Business Expenses
It's time to get down to the brass tacks. My name is Mel Sams and I'm the managing associate of Sam CPA in Dunedin, Florida. Today we're going to talk about deductible business expenses. I know that's a very broad topic but it's also a question that I get asked a lot when I'm sitting with a potential new client or even an existing client. People want to know what they can and can't deduct as a business owner. And you would think that would be a pretty straight forward answer, but it's not. So today we're going to talk about a few specific deductions that I see a lot of misconception around and want to clear up some of the the rules and the way these things are handled.
The first thing is a cell phone. Now we all have cell phones and we all use our cell phones and we might use them for both business and personal reasons. And I can tell you that until recent years, believe it or not, the IRS expected us to keep track of our business minutes and our personal minutes and take a pro rata deduction for the business portion. Now, after you finish containing your laughter on that, I will tell you that very few people followed that rule because it's not practical, it's not reasonable, there's no easy way of doing it. So a few years back, the IRS came out and said cell phones are no longer considered listed property. Listed property would be any business property that could also be used personally for which we're supposed to track our business and personal use. So cell phones, 100% deductible regardless of whether you have some personal use on them or not.
The next one I get asked about a lot is my car, my vehicle, my business vehicle. Now some businesses own the vehicles and they provide company cars to their employees or officers, which is great. And that's one of my preferred methods. But if your company doesn't own your vehicle and you use your personal vehicle for business, how do we keep track of that? What do we deduct? Well every year we get to choose between deducting the standard mileage rate or deducting the actual costs related to operating that car. Now I can tell you if you're a high mileage driver, the higher the miles go, the more your mileage deduction is going to outweigh the deduction for the actual costs. But actual costs also include the purchase price of a vehicle and there are some pretty lucrative depreciation allowances out there for certain types of business vehicles. So again, very good question, something you should be sitting with your CPA and discussing and going through the pros and cons and the different options.
Next up, home office. We've all heard the myths about home office that, oh, it's a red flag, it's an audit risk, all that, it's actually not. The IRS recently came out with what I like to call a standard deduction for home office. They know that people work from home, but they know people always don't keep the best records. So to come up with a happy medium, the IRS came out with a simplified calculation that says if you're running a business, you own a business and you work from home, then you can take a minimal deduction and not have to keep all the extensive records. Now you still have to keep some records but not to the same degree as if you were claiming the uh, the traditional home office expense, which is a pro rata portion of the operating costs of your household based on the square footage that's being used as a business. Now with that said, we still need to keep good records. We still need to document the fact that we are running a business and keep that in mind.
Finally one that I see slip through the cracks most often, meals and entertainment. Now we're going to talk in a second about the new tax law and how that's affecting all of this. But meals and entertainment typically have been 50% deductible up through 2017. You could deduct half of the cost of meals, a golfing, sporting events, plays, musicals, movies, whatever kind of entertainment you're doing for business purposes, you could deduct half of that. Now one nice loophole to that is meals that are consumed on the premises of the business for the convenience of the employer, meaning that if you have lunch delivered to your office so that your employees don't have to go out, they can stay, they can eat on site, and then they're ready to go right back into work, then that's 100% deductible because that is a meal incurred on the premises and for the convenience of the employer. So if you meet those two criteria, convenience to the employer on the premises of the business, then you likely have 100% deductible expense, and that's one I often see missed.
Now I do want to touch briefly on how the new tax law affects all of this. Now, starting in 2018 we're no longer allowed to deduct entertainment. Now again, I know what you're probably thinking and what we've all said is that, well, we're going to call it advertising or marketing and that's a decision you and your CPA need to look at and weigh out and go through the pros and cons of how we classify our expenses. But just know that entertainment is no longer deductible at all. One of the other changes in the new tax law is that employee business expenses are no longer deductible. These would have been those miscellaneous itemized deductions that you would have deducted on your personal tax return on schedule A, which would include mileage that you incurred at work for your job working for someone. Okay? Meaning you're not the business owner, you work for a business, you're a W2 employee, your unpaid mileage, unpaid cell phone, any other unpaid business expenses you may have had that didn't get reimbursed by your company, those are no longer deductible at all.
So when I speak of these deductions, I'm referring to business owners who are filing a business tax return or a schedule C on their 1040, a self employed individual and these deductions will apply to them. But nonetheless, aside from all of that, you should be sitting with your CPA discussing what's deductible, what's not deductible, what's the most advantageous way to deduct these things. And a good CPA can give you an answer that's going to put you in the most tax efficient situation possible.
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