Tax Deductions For The Self-Employed

Preserve Deductibility of Your Home Office Expenses Through Careful Bookkeeping and Records

There are a number of universal “truths” when it comes to home office deductions and the “mixed” use of property that can serve both personal and business uses, like vehicles:

(1) Do not commingle funds. It goes without saying that having multiple accounts for multiple business ventures, and your personal affairs, can be a hassle. Keeping separate accounts for these needs is nevertheless one of the essentials. You can often administer multiple accounts relatively easily online if you maintain your personal and business accounts at the same bank.

(2) Make sure the deductions you claim match your books and receipts. It is not difficult for there to be some “slippage” in how well you keep your receipts and the deductions you take on your tax return, however, an auditor will be looking for these discrepancies. Most accounting software such as Quickbooks allows you to automatically download credit card activity into your accounts. It is then up to you to match the entries to the correct accounts, or to delete the entries if they do not relate to your business. As with online banking and multiple bank accounts, it pays to keep separate credit cards for your business and personal affairs. This helps you avoid the commingling problems identified above.

The IRS is unfortunately fond of jargon and acronyms. In order to be efficient, auditors will look for “LUQ” items, or “large, unusual or questionable” expenses. There is no precise definition of what these items are, but when it comes to reviewing your own books, consider the following approach:

  • Do you have deductions for certain types of expenses that are much larger than others?
  • Do you have deductions that repeat more frequently than others? You may need to replenish your paper supply frequently, for example. There is nothing to say this is not deductible if used for business purposes, however, it might be wise to order in bulk if multiple orders stick out relative to your other expenses.
  • Does the amount of the deduction match the item to which it relates? A $700.00 deduction for renting a conference room for a hotel seminar probably “looks right”. A $700.00 deduction for office supplies might not.
  • Beware of the difference between capital and ordinary expenditures. If you purchase capital equipment such as a computer, for example, you may not be able to deduct the full purchase price in full. Rather, you must depreciate this type of equipment and take your deductions over the equipment’s “recovery period”.

Please do not hesitate to contact us for further information and tax guidance in managing your home office and “dual use” property tax issues.

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