Over the years, I’ve discovered there is a lot of misinformation out there regarding what is or isn’t deductible 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 equipment, 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 retailer 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 LLC 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 following 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 family-owned business, 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 US, under 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 Notice 2011-72 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.
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.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by Entrepreneur.com.ph.