Over the years, I’ve discovered there is a lot of misinformation out there regarding what is or isn’t when it comes to cell phones, technology and home offices. There is also a tremendous amount of unnecessary fear, and this is certainly the case when it comes to the home office deduction.
However, you can feel confident knowing that these are some of the best tax deductions for small-business owners -- and they're legitimate. Here are some important year-end considerations when factoring in these expenses:
Pre-payments and purchases
Year-end is a great time to consider pre-paying any expenses you plan to incur in 2017. If you plan to upgrade your phone or purchase some office , look at your numbers and consider the tax break in 2016.
Now, it’s worth acknowledging that some customers may not appreciate you making a pre-payment. This could, in turn, require them to recognize income that they aren’t planning on in 2016, although they may appreciate the pre-payment and avoid accounts receivable later. However, no is going to complain if you make equipment purchases before year-end.
Many accountants feel that when operating as an S-corp or in an with partners, doing tax-deductible reimbursements from the business, which are tax-free to the recipient business owners, is the best audit-proof strategy to guarantee these deductions. Moreover, doing it before year-end can further secure a deduction for 2016.
In fact, I think most business owners agree that if they wait until later the folllowing year, they will often forget deductions that they are thinking about now. It’s true that you can try and pull these types of expenses from credit cards, personal checkbooks and cash receipts, but to better capture these expenses early. It’s all about tracking the little things -- these tax deductions really add up.
Cell phones and service for owners and employees
If you have a , and everyone in the family has a legitimate and important role in the business, it's more than likely that every one of those cell phones in the pockets of your family members is a deduction!
I’m not suggesting that you abuse this deduction by any means. However, I am saying that everyone in the family should be involved in the business anyway. As such, this opens the door to the cell phone deduction for more than just you.
In the Small Business Jobs Act of 2011, Congress removed the cell phone from the “listed property” category. What this means is that you can write off 100 percent of your cell phone, correlated devices and service as long as you meet certain criteria. The IRS issued guidance with clarifying the rules and Congress’s intent.
Essentially, this move by Congress and the IRS was motivated by constant fighting in court with taxpayers who were trying to prove what percentage of their phone was business use vs. personal use. In the end, the cell phone and service boils down to a 100 percent deduction if you comply with the following criteria:
It can be shown that the cell phone is critical to the operation of your business.
The service expense and device isn’t extravagant and is proportionally reasonable for your type of business and sales.
You have a home phone line or separate cell phone dedicated to personal use.
Don’t forget: If you have your family members legitimately working in the business and they need to use the cell phone for the operations of the business, as well as need to be accessible for business duties, their cell phone will be deductible as well.
YEAR END TIP: Reimburse the cost of cell phone service for any family members working in the business in 2016.
Consider the following items and how you may use them in your business. Track them religiously and make sure to keep a detailed list and summary for your accountant next year.
Laptops, computers and printers
iPads, tablets and reading devices
Cameras, video cameras, lighting and studio equipment
Microphones, speakers and audio equipment
TVs, monitors, projectors and screens
Bluetooth devices and smart watches
Coffee makers and appliances
Internet service, fiber or related data needs
If you use these items exclusively in the office or take them with you everywhere to make money for your business, there’s a good chance they are 100 percent deductible.
YEAR END TIP: Purchase any of the above items before year-end and get the write-off in 2016.
Don’t be afraid to take the "business-use percentage" into account when deducting technology expenses. Higher-priced items such as computers and cameras may need to be prorated as part business and part personal. If your business is in its infancy and some items still have a percentage of personal use, it’s important to be honest about this and not be too aggressive. However, you shouldn’t shy away from these expenses, either.
Bottom line: Find reasons to use technology in your business. Make these items a deduction as you blow up your social media outlets and marketing plan.
Home office equipment
This is an area of tax planning that consists of far more than the plain vanilla deduction you have heard about or been told to watch out for in the past. There are several options to consider.
Think about all of the expenses that go along with a home office. Of course, as I stated above, technology expenses are part of the office, either from home or at a commercial location. However, office expenses could include any of the following:
Furniture and equipment
Office supplies and office space (see below)
Warehouse and storage
Again, consider the business-use percentage on bigger ticket items that see some level of personal use. Remember to take only a portion of the cost of these items as a deduction when you personally use them, and don’t overdo it.
The home office deduction
There may be some year-end reimbursements for home office use that should be accounted for before you close out the books on 2016. In fact, if you have an S-corporation, using a reimbursement procedure is an important step in an "accountable plan" that ensures your home office deduction (see more below).
I’m a firm believer that the home office deduction should be on almost every small-business owner’s tax return, but before you can talk about how to take the deduction, make sure that you're eligible. The two basic requirements for your home to qualify as a deduction are 1) you must regularly use part of your home exclusively for conducting business, and 2) you must show that you use your home as your principal place of business.
If you pass these two tests, then you can take a deduction based on the simplified or standard method.
The new simplified option can significantly reduce record-keeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses. This year it’s $5 per square foot of home used for business (maximum 300 square feet -- so essentially $1,500 per year).
Under the standard method, you can probably get a higher deduction in many instances; however, you will have to worry about a more technical calculation and face the issue of depreciation recapture in the future. Plus, you will be stealing deductions from your Schedule A in order to maximize this deduction -- though, in some instances, this could be a better route to take.
The new admin office strategy
This strategy has evolved in various tax court cases over the past two years. It gives an option to business owners who typically meet customers at a "main office" and would never qualify for the home office deduction. However, if they can show they come home to take care of email, billing, and various other administrative tasks, the home office can now qualify as an administrative office.
YEAR END TIP: If you have multiple businesses, i.e., a rental property business, use the home office deduction for this business instead of your primary or operational business.
A word about S-corporations
For those of you operating as S-corporations, a standard industry practice is to calculate a fair home office “reimbursement” amount and take a deduction for rent in the S-corp (and receive it as a tax-free reimbursement for the use of your home). As long as the amount would be similar to that taken with the home office worksheet for a sole proprietorship, this is a great way to take the deduction in a much less visible manner and reduce your chances of an or interest in you taking the deduction.
With that said, it’s important that you implement an accountable plan and also document it in your annual corporate minutes. This plan should include traceable dollar amounts directly related to cost and use of your home office, as well as a procedure for reimbursement.
In sum, make sure that you are tracking everything related to the office and the technology devices you use in your business. At the end of the year, you can meet with your accountant and make adjustments for areas that may be overly aggressive. Be cautiously aggressive, and remember that if you don’t write down and track the expenses, then you won’t even have a discussion point.
Don’t fail to take the deductions you’re entitled to just because you're afraid of an audit. The law is on your side.
Mark J. Kohler is a CPA, attorney, radio show host and author of and from Entrepreneur Press. He is also a partner at the law firm and the accounting firm . Check out or