Defeating the Grey Areas

Our latest blog focused on the importance of knowing what things you can look forward to writing off on your taxes this year. But just as important, you need to know all the things your business cannot write off as tax day draws closer. Battle this grey area, and be prepared before tax day.

​There is plenty of time between now and April 15th to get prepared for paying Uncle Sam, but there is nothing wrong with being prepared. The last blog we posted was about knowing what items, some often unknown, that you can write off your taxes. We all love that extra break at the end of the year and it can be a huge burden lifted off your companies' bank account. But are you just as familiar with all the items you cannot write off your taxes? If not, you could be in for a lot of frustration when you start preparing your taxes and getting prepared to pay for them. Don't get caught in that trap, be prepared before you even begin your fiscal year. Know what receipts you need to save and where you can help your business save money - and know what to avoid spending money on before you get ready to sign the dotted line on April 15th.

Let's start with some of the basic nondeductible recommended by Quickbooks. After Quckbooks help you track your project probability, manage your bills, track your business mileage, track your income and expenses, helps you prepare invoices and payments, manage your contractors, and pay your employees, it also offers this fantastic reminder of what you cannot write off and deduct from your upcoming taxes.

• Gifts to your customers. This is such an important business practice to show your appreciation to your clients or future clients. You can still deduct a partial amount of gifts for your clients, but it is limited. The IRS has a $25 limit on gifts that you can give throughout the fiscal year.
• Business Clothing.  The only time that you can write off clothing items is if they are uniform pieces or protective equipment items that you need to stay safe and aren't provided for you. Clothing items that you can wear outside of work or that you choose to wear outside of work cannot be written off.
• Commuting Cost. You can only write off mileage if you are traveling for business, not for your commute to your place of business every day. If you're traveling off-site to go meet or work with clients, that can be written off.
• Meals. Some food costs can be written off - but there are some parameters. You can only write off 50% of what you treat your clients to, and it must be properly documented to receive that deduction.
• Fines or Penalties. Any type of fine (including parking or speeding tickets) or law that is broken during work hours or when you're traveling for work, is never tax-deductible. This does include tax-related expenses, if you get a fine for not estimated your previous taxes, you cant write that off.
• Life Insurance Premiums. If you pay the premiums and your business is not the beneficiary of the plan, you cannot deduct this payment.
• Political Donations. You cannot deduct donations made to a political organization or a political candidate. Any expenses you rack up to lobby the government or pay to a group to lobby on your companies behalf you cannot write off either.
• Cellphone Expenses. This can be very tempting, especially if you don't have a separate cellphone for doing business. You can only write off the bossiness portion of these expenses. So, you need to calculate what percentage of calls were made for your business and only deduct the percentage of the expense.

How does this sound so far? Are any of these nondeductibles surprising or frustrating? Or were you already aware of these items? Well - the list continues. This one is a little more detailed and focused towards small business owners.

• You cannot write off payment to sole proprietors, partners or LLC members. They are owners of a business, not employees.
• If you claim a home office deduction and have a landline, the cost of the first landline to your home is not a deductible. Only the second line is deductible.
• Half of your self-employment tax is not a deduction. It is an adjustment to gross income on your personal income tax return.
• Owners of pass-through entities cannot treat their state and local income taxes on business income as a business write off.
• The cost of health coverage for self-employed individuals and more than 2% of S Corporation shareholders is not a business deduction. The premiums are deducted on the owner's personal taxes.
• Commissions paid in connection with buying realty are not deductible.
• For those who are self-employed, contributions to your own qualified retirement plans are personal deductions and not business deductions.

When knowing what you can and what you cannot write off your taxes - there is a lot of grey area. The IRS keeps a strict eye on both categories - so make sure you know exactly what you can write off, especially when there are certain items that you can only partially write off. It's so easy to make a simple deduction that won't be recognized so don't get caught. When planning out the fiscal year in front of you and your company,  make sure you plan on the extra expense of what you cannot write off. Use Quickbooks to your advantage and keep track of everything. You're nine months away from paying your taxes, but we are already halfway through the fiscal year. Be diligent in paying attention to your expenses!