11 Commonly Overlooked Tax Deductions
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As a small business, you need to take advantage of every tax deduction that applies and make sure that you don’t leave money on the table. Below are 11 commonly overlooked tax deductions and ways to make sure you take advantage of these on your next tax return.
Commonly Overlooked Tax Deductions
- Failure to keep a mileage log
- Failure to keep cash receipts
- Failure to document non-cash charitable contributions
- Failure to consider home equity debt to pay-off consumer debt
- Failure to identify all medical expenditures
- Failure to consider employing your children
- Failure to track investment expenses
- Failure to maintain a separate room for business activities
- Failure to track additions to basis
- Failure to claim “hung-up” passive losses
- Failure to consider contributions of appreciated assets
1. Failure to keep a mileage log
Business use of an automobile is common to virtually every small business. The cost of the automobile is deductible based on the percentage of business use. The taxpayer has the option of using the business percentage of actual amounts spent (including depreciation) or using the standard mileage allowance. The most critical hurdle is keeping adequate records of the business usage. Taxpayers should keep a log of all business trips, total the log and compare the total business miles to the total miles per the odometer. Failure to track the mileage can result in disallowed deductions.
2. Failure to keep cash receipts
Taxpayers typically have cancelled checks and credit card statements as support for business expenditures. This documentation captures the larger items. It is not uncommon, however, for an entrepreneur to spend hundreds or even thousands of dollars over the course of a year in small amounts of cash. The receipts for business lunches or other expenditures made in cash are often discarded and the deductions forgotten. We recommend that taxpayers submit regular expense reports for personal reimbursement from their business checking account. The receipts then have a logical filing place as support for the reimbursement.
3. Failure to document non-cash charitable contributions
The fair value of non-cash charitable contributions is just as deductible as cash contributions. That includes mileage driven at 14 cents per mile. It also includes the “thrift shop value” of clothing and household goods donated to Goodwill or any other qualified charity. Taxpayers should keep detailed records of the items given and be careful to use realistic values. We all know that a 3 year-old shirt that cost $20 new isn’t worth $10 used. Taxpayers need to get receipts from the charity. Non-cash charitable contributions must be reported separately on Form 8283 when they exceed $500. Large contributions should be supported by an appraisal.
4. Failure to consider home equity debt to pay-off consumer debt
Consumer debt including debt on car loans, credit cards and unsecured credit lines is not deductible. Generally, interest on a home equity line of up to $100,000 is deductible. Taxpayers should carefully weigh the risk is exposing their home to additional debt, but they can benefit from turning interest payments into tax deductions. There is a side benefit in that payments and interest rates are often lower on home equity loans.
5. Failure to identify all medical expenditures
While the deduction thresholds have risen for most taxpayers, deductible medical expenses can include items other than payments to doctors or health care facilities. These expenses can include such services as massage therapy or swim club fees necessitated by a medical condition. They can also include special equipment purchased for therapy. Capital expenditures can be deductible to the extent their cost exceeds the increase in value of the property. Of course, all of these expenditures should be supported by the written advise of a doctor.
Not sure you’re taking all of your allowable business deductions? Get a 30-day free trial and ask our consulting team.
6. Failure to consider employing your children
Employing your children in your business can result in a business tax deduction, with little or no increase in tax on your children. The children can take advantage of the standard deduction to shield income from income tax. Further, if the employment is in a Schedule C business and the child is under 18, there is no Social Security or Medicare tax on the income. Of course, the actual duties performed should be documented and the compensation should be reasonable in relation to the duties.
7. Failure to track investment expenses
The costs of maintaining investments are allowable as miscellaneous itemized deductions, subject to the 2% floor. Taxpayers will generally keep up with advisory fees and other direct fees paid, but should also track such expenditures as magazines, newspapers and investment services purchased to manage an investment portfolio.
8. Failure to maintain a separate room for business activities
The business use of home deduction requires, among other things, that a separate area be maintained. In planning a home-based business, care should be taken to identify appropriate space and isolate that space from the personal residence. The square footage of the separate area is then compared to total square footage to arrive at a deduction.
9. Failure to track additions to basis
Investments are often made and forgotten, but the basis in the investment can change over time. The basis in mutual funds increases as dividends and capital gains are added back to the funds. The basis in partnerships and S Corp stocks changes as taxable income is reported or distributions taken. The basis in your home changes as you make capital improvements or sustain a casualty loss. All of these changes must be tracked so that the taxpayer claims his full basis when the property is eventually sold.
10. Failure to claim “hung-up” passive losses
Passive losses are generally limited to the amount of passive gains. It is not uncommon for taxpayers to build up large amounts of passive loss carry forward because of limits on the losses of partnerships or real estate investments. When an investment is sold, any losses still pending from that investment are allowed in full. Taxpayers should be careful not to overlook the carry forward amounts in the year of disposition.
11. Failure to consider contributions of appreciated assets
Taxpayers should consider using appreciated property, such as investment stocks with large unrealized gains, in making charitable contributions. When appreciated property is donated, there is no capital gain to report, yet the entire value of the stock is allowed as a deduction.
As a small business owner, it is important not to leave money on the table. For less than $20 per month, our consulting team can help you make sure you are taking advantage of all of your allowable tax deductions.
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