As a home business owner, you are not only expected to know all the ins-and-outs of your operation, but it is also vitally important that you stay up-to-date on all trends that may affect your business. One recent development that is certain to have an impact on your business is the new tax act introduced by the government. While it is generally viewed as a win for the majority of small businesses, home business owners will still want to familiarize themselves with the changes and meet with their accountants to ensure that they are maximizing earnings while remaining compliant at all times.
One tweak to the bill that is bound to affect many home businesses is the Qualified Business Income Deduction, especially those that are considering hiring. The deduction only applies to pass-through entities, like sole proprietorships, s-corporations and partnerships and may affect whether you employ a W-2, whose payroll taxes are automatically deducted from their paycheck and paid to the government through the employer, versus a 1099, who is considered an independent contractor and responsible for calculating and remitting their own tax liabilities.
The deduction affects hiring because it is limited to the lesser of:
- 20% of qualified business income, or
- 50% of the total W-2 wages paid by the business
So, if a home business owner hires or employs mostly independent contractors, their W-2 limitation would be small, and in-turn, their Qualified Business Income Deduction would be small. While there are a number of additional factors and implications, like healthcare and other benefits, the owner should meet with their accountant or bookkeeper to see what makes the most sense for their business.
Home business owners will also want to reconsider their meals and entertainment expenses. Under the new act, business owners can no longer expect a 50% reduction if they show their best customers how appreciative they are of their business by taking them out for a round of golf or buying tickets to a local sports team.
Additionally, there are changes to meals as they pertain to internal team members. In the past, home business owners could expect the government to front half the bill if they wanted to treat the team to a morale-boosting happy hour of drinks and appetizers. Under the new act, however, a meal is only deductible when traveling, so if the owner and top managers are traveling to an industry event, all meals are deductible by 100%.
The best way for home business owners to ensure that they are staying compliant when it pertains to the new tweaks in the tax act is to set-up a system for collecting and saving business expense receipts. Luckily, in today’s technologically advanced world, there are business applications that allow owners, managers and employees to use their smartphone to simply snap a photo of the receipt and upload the important data points, like totals, vendor names and dates, to their cloud as well as their accounting software.
But meal and entertainment expense receipts are not the only documents that home business owners will want to keep their hands on for tax deduction purposes. Even while regulations change with the new tax act, there are a number of generally accepted deductions that every home business owner should realize. That being said, the most important thing is to diligently keep detailed records throughout the year so that when it does come time to file, the process is easy and cost less. Some deductions that home business owners should keep on file include:
- Utilities – This deduction applies directly to the work from home warriors. If you operate a home office, it is important to keep records of every water, heat, trash removal and any other utility bill because they are deductible.
- Professional Fees – Did you meet with an accountant to discuss how you can maximize tax deductions? How about a business consultant to figure out a way to scale your business? Any meeting with a business advisor throughout the year is deductible.
- Software – All business software, from accounting apps like QuickBooks to website development software like WordPress, can be reimbursed with the proper records.
- Education – If you attend industry events or seminars, they are considered “educational expenses” and fully deductible as long as they are business related.
- Advertising and Marketing – Traditional advertisements, like business cards and yellow page listings, are obvious forms of advertising that are deductible, but do not forget about social media. Did the business pay for any premium Twitter, LinkedIn or Facebook accounts? If so, make sure to include in your filling.
- Insurance Premiums – While they are mostly an annoyance, at least they are deductible when related to the business. This includes credit, liability, malpractice and workers’ compensation, among others.
- Bank Fees – Probably the only thing as annoying as insurance premiums, but they are also deductible.
- Taxes – Many owners may not realize it, but they can deduct the taxes they incur by running their home business.
- Repairs and Maintenance – Have to call your IT guy with a computer problem or take your iPhone to the Apple Store because it was on the fritz? Make sure you keep the bills and receipts.
- Petty Cash – While you may not deal with it often, businesses can lose hundreds of dollars a year because they consider petty cash small and insignificant at the time. It all adds up and that is why it is necessary that you keep sound records of all transactions.
All home businesses should have a general understanding of the tweaks to the new tax act, as well as know what is and is not deductible. However, the most important thing is to record and file all business transactions throughout the year. The days of handing a shoebox full of crumbled receipts over to an account are gone because it is easier than ever to collect digital files of all business documents. By doing so, the home business owner can simply email over the file folder once tax season comes around and ensure a stress-free process while maximizing the most out of their deductions.
