Most small business owners have heard that they're supposed to get special tax breaks. The problem is, they don't know what they are or how to go about claiming them. Not surprisingly, the IRS doesn't go out of its way to spell it out for you when you go to file your income taxes!
There is a general rule in tax law that says all "ordinary and necessary" business expenses are deductible. I'll spare you the details about the arguments over this phrase, but suffice it to say that it basically means that in order to be deductible, an expense must be a legitimate expense that pertains to your business.
So what personal expenses do you have that could legitimately pertain to your business? Well, let's take an easy one: Subscriptions. Do you subscribe to your local newspaper? Can you deduct it? Well, do you need to keep up on your competitors' advertisements in the paper? Do you need to keep abreast of the job market via the classified ads to make you more effective at hiring and compensating employees? Any other reason you might need to read your local paper? If so, you can deduct it. Same with your local business journal, The Wall Street Journal, and various industry and trade publications.
Next is clothing. The IRS says any clothes suitable for wearing outside of work are not deductible as a "uniform." So a pair of blue jeans, or even a business suit is not generally deductible. But if your company name is printed on your shirt, jacket or other clothing, that item becomes deductible.
If you have kids, I don't have to tell you how expensive they are. Well, how would you like to deduct their allowance? The cost of their clothes? Heck, even the cost of their college education? If your kids work in your business, you can pay them reasonable compensation for doing so. So when Johnny needs a new pair of jeans and a leather jacket, put him to work! You give him a paycheck, he buys the clothes, and you've just turned a personal expense into a business deduction. The same can be said for building a college fund. If your children work for you, you can pay them and put the money in the bank for college costs. Note that even if your children are young, you can pay them to appear in an advertisement or brochure promoting your business.
Please note that the IRS will scrutinize payments to family members, so you must make sure you dot your i's and cross your t's. Make sure the kids actually work for you, that their pay is reasonable, and that you keep track of their hours, pay any payroll taxes due and treat them like any other employee.
Even your vacations may be partially deductible. Try arranging a trip around a business seminar in the location of your choice. There are usually plenty to choose from. Only the expenses for the time actually at the seminar will be deductible, but so will the airfare, many of the meals and much of your hotel costs. If your wife and kids work in the business and there is a legitimate reason for them to attend the seminar, their costs may be deductible as well. Keep in mind there are limitations on this technique, so check with a tax advisor before making your plans.
These are a few ideas that could save you hundreds or even thousands of dollars over the life of your business. If you think about other expenses in your life, I'll bet you can come up with even more. Remember to consult a qualified tax advisor before implementing any of these ideas, be reasonable, and always make sure the expenses are legitimate. You have every right to arrange your affairs so as to result in the lowest tax you are legally required to pay. Just don't cross over the line of common sense and reasonableness.
Thomas Norton, CPA is the St. Louis based founder and owner of Thomas Norton & Company, LLC. Tom specializes in small business taxes and accounting, and is available to speak to your group on various small business and tax topics. For more information and to subscribe to his free monthly email newsletter that gives timely tax and financial advice, go to thomasnortoncpa.com/newsletter.shtml