Tax Deductions | Incite Tax

Let's talk about some tax deductions. One of the most common ones that we've heard get asked about is the home office deduction. We don't love this tax deduction because it has been known to increase the DIF score with the IRS. That is a computerized score That as it increases in the IRS's system, they choose to audit people. It also doesn't give you a very good actual tax deduction. Most people who are able to take it also own their home, where you can already take all of your interest and property tax as an itemized deduction. The home office would then just take a portion of that, plus you add a portion of maybe your utilities and all those things. But documentation can be tricky. The IRS doesn't think that you actually use your home office just for business purposes, which is one of the rules, and therefore it's very easy for them to overrule that. Now, the calculation can get complicated. That's— there's a direct method, as they call it, where I can take the direct costs I have, like I mentioned, interest, property tax, utilities, internet, those types of things, and then I take that expense times the percentage of my home that I'm using for business, and that gives me the actual expense. The expense is then used to reduce my taxable income And so the home office expense that reduces my taxable income is not the dollar-for-dollar savings that I actually get, and if people actually pause to look at it, they're going to notice that it is in fact not a lot of money. Now the IRS did come out with a thing called the Alternative Simplified Method to calculate the home office, but it's still Has all the other problems with it that it's going to increase the chance of being audited, and even simplified method, not really a great actual tax savings. So we don't actually love the home office. What we love is a strategy we call corporate rent, others in the world call the Augusta Rule. Very important on this rule that you follow the letter of the law, When it comes to the tax code. You can— the way that works is you can rent your house. I shouldn't say you. Your business can rent your house from you to have a company board meeting once a month, for example. Now, we've talked about this in so many other videos, so I'm not going into a ton of detail. on this video because I wanted to really highlight the difference between the home office versus the corporate rent strategy. But anyways, your business can rent from you as an individual, your house, to have a meeting once a month. And so based on the tax rules, because you're not renting your house out for that many days, you actually find an area in the tax code that allows you to not have to claim that rental income. Now you don't get to claim any sort of expenses for renting the house, but you don't have to pick up any of the income. It works out great because then your business takes a rent expense, but you personally don't have to pick it up as rental income. That gives you a much better tax strategy, a much better tax savings than the home office deduction. So when it comes to That tax deduction, home office versus corporate rent, or again, some people call it the Augusta Rule. We like the Augusta Rule much better. We call it corporate rent because that is the practical nature of what we are doing. Instead of going to a convention center and renting a space from there to hold a monthly board meeting, I'm just going to use my house and I'll have all the event stuff there as opposed to some other place that I don't really benefit from. Another tax deduction we can talk about is your car. Hey, can I write off my car? You bet you can. There are one of two ways in which you can write off a vehicle when it comes to taxes. You can either take the actual expenses that went to the car, or you can take your mileage deduction. Well, some people Here, those 2 options alone, as explained very simply like I just did, and they're like, oh, well, I don't want to keep track of my miles, so I'm just going to keep— I'm just going to write off what I actually spent on the vehicle. Well, unfortunately, when you're using actual expenses, the IRS says, hey, we'll let you deduct the actual expenses of your vehicle that you used for business. That you use for business. That's kind of the phrase that really gets us, because that means if you're audited, you have to be able to prove how much you use the vehicle for business. And if you can't prove it, then none of it was used for business. How do you prove how much of your car was used for business? You keep track of your miles. So you are going to need a business mileage log regardless of what method you choose, because if you don't have it and you're audited, it for sure is gonna— they're gonna disallow the deduction. So there are tons of apps out there these days. Feel free to use one of those. I'm old school. I've used, uh, a print-off. I have a print-off I make every year that has the date and a dash next to it, and I can write how many miles I drove the previous day. Um, that's the way I keep my miles. Now, a mileage log doesn't just include miles. You also need to include what was the purpose of the trip. I personally have all that information in my Google Calendar, which I can then print off once a year and save my calendar plus the miles that I'm keeping down. That's my business mileage log. So again, that's necessary whether I'm going to take a mileage deduction Or actual expenses. When it comes to actual expenses, this is anything you put into the car— gas, oil changes, repairs, new tires, windshield wipers, batteries, insurance. Those are the general ones that come to mind. But then I take my business use percentage of those. So let's say I keep track of my miles. Turns out 90% of my car was used for business purposes. I would take 90% of my car expenses as an actual tax deduction. Or I can just look at how many miles I drove that year. Let's say it was 10,000 miles. I will then look up what is the mileage rate that year. The IRS changes it every single year, and sometimes based on inflation, they'll actually change it in the middle of the year. Uh, so you can look up whatever current year we're in And look up whatever that mileage rate is. But you know, maybe that 10,000 miles gives me a $5,000 tax deduction, that turns out to be better than what I actually spent on the car. Well hold on, I'm, I'm making car payments, there's no way. Well now we get into some further elements of the how do I write off my car. If I buy my car, the payments I'm making every month, are not 100% an expense, because if I took a loan out on that car, I don't have to claim the loan that I received as income, which means when I pay it back, the IRS doesn't let me expense it. The interest amount is part of my actual expenses, so if I'm making car payments, the interest expense would go into the other things that I talked about. Now, if I'm leasing the vehicle, the full payment would be included. So it's not uncommon for us to see if someone bought a car and it didn't qualify for a massive bonus depreciation write-off in the first year, they're likely going to take business miles on it. If they lease the vehicle, they're likely going to take actual expenses because usually that's— You want to take the method that's going to give you the best tax write-off, and that, that's how that works. So that's how you actually write off your car. Yes, you can do it. No, it doesn't need to be titled in your business name. You don't need to wrap the car if you don't want to. None of those things are required when it comes to being able to claim business use of a vehicle. But having a mileage log, probably the ultimate most important element Of making sure, however you choose to write it off, that you have evidence so that if you're audited, you can defend that element, because they will come after your miles. It's one of the easiest things for them to come after. Third one we can talk about is education. Now, this term means different things to different people. When it comes to the tax rules, if I'm a student and I have an education expense, that might even qualify for a credit. Now we're talking about tuition, higher education, those types of things. As a small business owner, I might need education or continuing education. Now that could be a required certification thing that I need. It could be things that are required to maintain something that I already have. Like as a CPA, I have to get 80 hours every 2 years of of continuing education credits. So that would be education. But the IRS defines for businesses, an education expense is anything that maintains or improves a skill that's needed in your present work. So if it falls under that category, maintains or improves a skill needed in your current work, then you can expense it. And the sky's the limit with that when it comes to, oh, it's just a short list of things. No, if it's money you spent on something that helps you maintain or improve a skill needed for your current work, that qualifies as an education expense, and therefore you should write it off. Again, different than saying I'm paying money to a college or a university. which potentially allows me to earn some credits. A couple things to note about the education credit though, if the thing you're paying for isn't necessarily related to your current business, the IRS actually disallows that as an education expense in your current business. So if the skill could be used in a new trade or business, There's actually a separate set of rules that look at what that expense looks like, and you're likely going to need to take it on whatever that new trade or business entity would be anyways. So just make sure that you understand that's a distinction, especially when it comes to how you document things. The expense needs to be to maintain or improve a skill for your current work. As long as it fits that, You're good. So there you go, 3 easy deductions that super, super common for business owners to have or should have. Make sure that you're taking advantage of the full tax code. If you have any questions about what we talked about here in this video, don't hesitate to reach out. Let a professional guide you through what's the best method to do. That works for you. Remember, the IRS, not your friend. Don't— you're not inviting them to your birthday party. Stop giving them your free money. Let's keep more of it in your pocket.