Tax deductions. These are two of many business owners favorite words when tax season rolls around. While taking tax deductions are great, many business owners tend to misunderstand what this really means for their business.
Take a look at these misconceptions about tax deductions that business owners make.
Misconception 1: Expenses are always valuable tax deductions
It’s become a trend among many business owners to rack up on expenses so that they can reduce their tax bill. While being able to write off business expenses is great, you’re not actually saving yourself money if you’re spending it on things you don’t need.
Think about it this way. When you write off a business expense, let’s say you save 25% in tax due to that deduction. However, you’re still out of pocket the remainder of what you spent on that expense. So if you’re spending money just to save on taxes, it’s time to rethink your system.
Misconception 2: Business owners can write-off all gifts, meals, and entertainment
- Entertaining clients (Golf, concerts, games, etc.) – 0% deductible
- Business meals with a client – 50% deductible (100% if purchased from a restaurant)
- Office snacks and meals – 50% deductible (100% if purchased from a restaurant)
- Company-wide parties – 100% deductible
- Meals and entertainment provided as compensation – 100% deductible
Misconception 3: Deducting your home office is a red flag for an audit
While writing off a home office may have been a red flag in the past, this is no longer the case. Home offices have become so commonplace that this tax deduction no longer automatically sets off the IRS alarms. While deducting a home office does come with increased scrutiny, they are now so common you don’t have to be afraid about claiming it as a legitimate tax deduction. If you do deduct a home office, just be sure to accurately and honestly report your home office space.