By Dan Yue, Senior Associate, CST Group
One of the most frequently asked questions I hear from self-employed LLC clients is: Can I deduct this business expense? I would like to answer that question here and clarify some of the confusing aspects of business tax deductions for self-employed LLC owners.
Home Office
If a certain area of your home is used regularly and exclusively as the principal place of your business, you could claim it as your home office. You may choose to use either the simplified method or the regular method. In general, the simplified method is easier to calculate, as it takes a standard deduction of $5 per square foot of home office (maximum 300 square feet which is equal to a maximum of $1,500 deduction). The regular method takes deductions for actual expenses: mortgage interest, insurance, homeowner dues, utilities, repairs, and depreciation. The benefit of using the regular method is if your current-year business net income is not enough to absorb the home office deduction, it allows you to carry over the home office expenditures to the following year, so you don’t lose it.
The following is a checklist to help you get ready for your home office deduction:
- What is the square footage for your home office? (This calculation is necessary when using the simplified method and regular method.)
- What is the square footage for your entire home? (This calculation is necessary when using the simplified method and regular method.)
- How much was the cost of your home? Usually, a copy of the settlement statement would be sufficient. (This is necessary when using the regular method.)
- Were there any major improvements to your home? (This is necessary when using the regular method.)
- What were your current-year expenses on insurance, HOA fees, utilities, and repairs? (This calculation is necessary when using the regular method.)
The IRS has released a comparison of these two methods. To learn more about it, click here.
Car
In general, you now have two choices to claim car expenses: Actual Expenses or Standard Mileage Rate. Just as the names indicate, you could:
Either: Deduct all of your actual business-related car expenses, including gas, repairs, insurance, leasing payments (for a leased car), and loan interest and depreciation (of the car you own).
Or: Use the standard mileage rate, where you multiply the total mileage by standard mileage rate* and add in tolls and parking to calculate your deduction. Only the business use of your car produces a tax deduction, so it is imperative you keep good documentation of your trips: As a best practice, be sure to record the date, mileage, tolls, parking costs, and the purpose of your trip.
*The IRS releases the standard auto mileage rate for each year. In 2016 it was 54 cents.
Travel, Meals, Entertainment, Gifts
The cost of travel is 100% deductible. However, you can only deduct 50% of your meals while traveling. Once you get home, your on-the-job meals aren’t deductible, unless you bring along a client to talk business. The 50% deduction limit also applies to a majority of other client entertainment expenses.
You can also take a gift deduction of up to $25 per person per year.
Other
Below are other business tax deductions to consider:
- Insurance premium
- Retirement contributions
- Advertising and promotions
- Business-related magazines and books
- Online computer services related to business
- Office supplies, office furniture, and software
Preparing and filing your year-end taxes can be extensive work, as you need to gather a lot of information in a limited time frame. If you have any questions regarding your business deductions, please consult with your tax advisor.
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