It is the time of year when businesses close the books and prepare for the completion of 2013 tax returns. To minimize tax liability, business owners look to deduct as many expenses as are allowed by the Internal Revenue Service. Professional tax advisers, such as CPAs, know the nuances of the IRS Code and may be able to identify tax savings that might otherwise be missed. Here is a sample of allowable income tax deductions that may be considered:
Business meals: The IRS limits the tax deduction for business meals to 50 percent of the outlay. However, there are several exceptions that are not subject to the 50 percent ceiling, thereby allowing a 100 percent deduction. Broadly, one exception includes on-site meals provided for the convenience of the employer, such as short meals provided for a deadline or special situation. The tax code also allows a full deduction for costs of recreational or social activities that are mainly for the benefit of employees who are not highly compensated, fringe benefits such as coffee or tea, and expenses directly related to business meetings of employees, stockholders or directors. For example, lunch ordered in for a departmental meeting would be 100 percent deductible as would expenses incurred for a company picnic or holiday party.
Travel: Ordinary and necessary (not lavish or extravagant) business travel expenses are 100 percent deductible, but costs incurred for personal reasons are not. Personal and business components can be, if the primary purpose of the trip is business. However, travel costs for spouses or non-employees are considered personal and are not deductible. Some allowable travel deductions include airfare, taxis, lodging, dry cleaning and laundry. Documentation to support the deduction should include the business purpose and time spent on business activities. Support for this deduction is made based on the facts and circumstances of each situation.
Auto expense: For business use of an automobile, the IRS allows a company to take a deduction either using the standard mileage rate or the actual-cost method. The standard IRS mileage rate in 2014 is 56 cents a mile (56.5 cents a mile in 2013), which includes a factor for depreciation, gas, insurance, repairs and maintenance. Alternatively, the actual costs for these items may be paid for by the company with the personal-use value of the vehicle added to the employee’s W-2 form as a taxable benefit.
• Self employed health insurance for S-Corp greater than 2 percent shareholder: Health insurance premiums paid by the company on behalf of the greater than 2 percent S-Corp shareholder are deducted on the company tax return but are also added to Box 1 of the shareholder’s W-2. The shareholder return will report the income and an equal deduction on the individual tax return. Because this is not considered wages, it is not subject to FICA or FUTA even though it is included on the W-2. If the shareholder avoids the step of adding the cost to the W-2 and directly takes the deduction on the individual return, there is a risk the deduction will be disallowed. Furthermore, the company will miss the deduction on its return, which will result in the payment of a higher 1.5 percent state replacement tax in Illinois.
To maximize the benefit for these tax saving ideas, companies should adjust the general ledger and maintain separate accounts for each of the pertinent expenditures. Additional documentation also may be required, such as mileage logs or other supporting details.
• Michelle DellaMaria is a CPA and certified valuation analyst with Caufield & Flood Certified Public Accountants in Crystal Lake.