Ski Your Way Into Tax Savings: Top 5 Tax Savings Myths

Myth #1 – You can avoid taxes by purchasing a new set of skis (or equipment)

Business owners often purchase new equipment in hopes of saving money during tax time. But what many forget is that you have to spend money to actually save money. For example, if you are in the 30% tax bracket, you will only save 30 cents for every dollar you spend on equipment. So if you really need the new skis or computer, then it’s fine to spend the money, but don’t buy unnecessary equipment and overwhelm the business with additional debt just to save a few dollars at tax time. Ask yourself if it’s really worth it to spend $1,000 on those new skis to save $300 at tax time?

Myth # 2 – Business meals are fully deductible

Did you know that business meals and entertainment are only 50% deductible? The following is a list of the type of expenses that are allowed for meals and entertainment:

  1. Taxes and tips relating to a business meal or entertainment;
  2. Cover charges to a club or venue;
  3. Rent paid for a room used for a business event;
  4. Parking;
  5. Meals and entertainment while traveling away from home for business;
  6. Entertaining customers at a restaurant, and
  7. Convention costs.

So you may want to reconsider how much you spend on those business meals and ski trips as you can only claim half of the expenses and be sure to keep those receipts.

Myth #3 – Home office deduction

The home office deduction does not increase your risk of audit and the IRS has made it much easier to claim this deduction. In addition, business owners often believe that the home office deduction will yield a huge deduction, most likely it will not. The home office deduction can only be claimed for the portion of the house that is used regularly for business and it is your principal place of your business. There are two methods in which to calculate the home office deduction; the regular method, and since 2013, the simplified method. With the regular method you determine actual expenses related to the home office; these would include mortgage interest, utilities, real estate taxes, repairs (only if they directly benefit the business) and depreciation. The amount you are allowed to deduct is based on the portion of the home that you use for business. So if you use 25% of your home for business, then you would be able to deduct 25% of those expenses. Under the simplified method, you don’t need to determine those expenses, you just need to know the square footage of the office space and multiply it by a predetermined rate issued by the IRS. The amount per square footage is $5 for 2014. The home office deduction is almost as easy as coming down the bunny slope!

If you are an employee that receives a W2 and you have a home office that you use regularly for business purposes, the home office deduction is reported as an itemized deduction on Schedule A and is limited to 2% of your adjusted gross income. As a result, most employees with a home office receive a very small benefit from the home office deduction.

Myth #4 – Automobile expenses

As a business owner you use your car for business purposes, perhaps driving to the slopes for that business meeting and you want to deduct the auto expenses for that trip. Well it might not be as easy as the slope you were looking at on the trail map yesterday. First of all, a car is defined by the IRS as a four wheeled vehicle with a gross weight less than 6,000 pounds. In addition, you have to take a look at it, is it a mixed use vehicle, business and personal use? If it’s a mixed use vehicle, you will have to keep track of the miles you drive in total and then how many of those miles are for business. Now the question is, how much can you deduct? There are two methods to calculate the automobile expense deduction, the standard mileage rate or actual car expenses. The standard mileage rate for 2014 is 56 cents per mile and this amount changes each year. You simply take the number of miles you drove for business purposes and multiple it by 56 cents and deduct the result. The actual car expense method is a little more cumbersome, kind of like the black diamond you don’t really want to ski down. You must divide your expenses between business and personal use and track the actual expenses you paid for your car. Those expenses include gas, oil, tolls, lease payments, insurance, repairs, registration fees, tires and deprecation.

Myth #5 – You can avoid taxes by using independent contractors versus employees

When you use independent contractors, it’s true that you don’t have to pay payroll taxes, but there are very specific tests which determine whether or not someone is an independent contractor or employee. The business owner must review the relationship between the business and the worker and how much control the owner has over the worker. As the business owner, do you have the right to control what work is done and how it’s done? Does the business tell the worker what time to show up and how long they need to stay? If the answer is yes to both of these, the worker is an employee. An independent contractor usually has multiple clients and uses their own tools and supplies to complete the work. They also set their own hours and bill the clients with an invoice. There are filing requirements for both employees and independent contractors; quarterly payroll reports are required by the IRS and state taxing authorities for employees and for contractors the business will need to issue 1099’s in January of each year.

2017-02-17T04:51:52+00:00