Benjamin Franklin once said, “Nothing is certain but death and taxes.” While that’s not exactly true, the most quotable Founding Father in history makes a good point. Don’t cheat on your taxes. It’s immoral, it’s super illegal, you’ll almost certainly get caught, and the penalties – which can include time in federal prison – dramatically outweigh the short-term gains.
Write-offs, or deductions, are where many people get into hot water. Questionable write-offs can trigger an audit, and audits never lead to anything good. Ensuring that you’re staying legal is important to every businessperson – whether you’re the owner of a small start-up or a key innovator in biotechnology financing like Lindsay Rosenwald.
Follow this guide to staying legal. It’s important to point out that this is merely an informative place to start. Tax law is complicated and changes frequently. The Credits & Deductions portion of the IRS’s website has official policy and legal specifics.
There are many deductions that can save business owners big bucks, but you’ve got to play it straight if you want to avoid stiff penalties.
According to the book Home Business Tax Deductions: Keep What You Earn, a tax deduction is “an amount of money you are entitled to subtract from your gross income (all the money you make) to determine your taxable income (the amount on which you must pay tax). The more deductions you have, the lower your taxable income will be and the less tax you will have to pay.”
The Home Office Cheat
The IRS allows business owners to deduct expenses associated with maintaining a home office, including a portion of your rent and utilities. This is one of the most common cheats and therefore throws up a red flag to the IRS.
Your office must be used for business and only for business. It can’t also be your bedroom or garage. It must be reserved exclusively for your money-making enterprise.
The Business Dinner Cheat
Business and pleasure often overlap, and the IRS makes room for this, allowing deductions for certain types of business-related entertainment and meals. This is where the waters get murky because there are no hard-and-fast rules.
A good rule of thumb is to be reasonable and be honest. If you’re out with a client for the final discussion of deal you’ve been trying to close, you can probably write off some of the meal. If you and a buddy are having cheeseburgers over a discussion about how you’re going to open a store together one day, pay for your cheeseburgers.
Well-planned deductions can erase part of an ugly tax bill.
The Gas Cheat
This is – with no close second – the number one deduction that triggers an audit. Gas is expensive, and the IRS has strict rules governing the reasons travel expenses may or may not be written off. Some gas prices can be written off on trips that were exclusively for business or to and from educational classes related to your business. You don’t write off the entire cost. The IRS provides a standard mileage rate that changes often.
You must meticulously keep all receipts and records. Gas write-offs draw suspicion, and you very well might have to explain your deductions.
Don’t cheat the taxman. It’s a civic duty – other taxpayers wind up footing the bill, and it detracts from our national wellbeing. If tugging at your intrinsic sense of morality doesn’t work, believe this: You’ll probably get caught, and when you do, penalties are serious and expensive.
The IRS provides many areas where businesspeople can maximize their profits by utilizing deductions. Take advantage of every single one, but don’t take advantage of the system.
Janet Lilly is a full-time freelance writer who enjoys focusing on a wide variety of topics. She specializes in small business issues and profiles of prominent industry leaders.