Tax Deductible Expenses: Capture Them All!

Holiday shopping is upon us and year-end is just around the corner.  I always feel like a meteor hurtling through space at this time of year with impact being the start of tax season, or “busy season” as we call it in the accounting world.  As you look to close out the books on this tax year, be sure that you are capturing all your tax deductible expenses.  Here are a few items that you don’t want to miss….

Credit Card Expenses

Most credit card statements do not close at the end of the month.  This means that you may be paying In January or even February for charges made in December.  The IRS treats credit card expenses as cash payments.  You can deduct charges made in this calendar year even if you don’t pay for them until the next one.  Be sure that you enter and reconcile all credit card charges up through 12/31 into your accounting system to maximize your tax deductions.  This applies to both cash and accrual basis taxpayers.

Accrued Expenses

If you are an accrual basis taxpayer do not forget to capture all of your accruals.  You likely already know about entering invoices received in the following year for expenses incurred in the current one into Accounts Payable, but don’t forget you can also accrue salaries and wages and employee bonuses.   Salaries and wages should be accrued for hours worked within the current year but included on a check in the following year.  You have more leeway with the payment of employee bonuses though.  Accrued bonuses must be paid within two and a half months of year-end for them to be deducted in the year accrued.  Check your cash flow projections and don’t accrue what you cannot pay out early in the following year.

Depreciable Assets

Purchasing assets is a common tax strategy at year-end; however, those assets must be placed in service before 12/31.  “Placed in service” is a fancy way or saying that they must be in use. When purchasing an asset give yourself enough time to also get any necessary installation and training done prior to year-end so you can begin utilizing the item.  Be sure to talk to your tax accountant if you have any questions about what assets qualify and how much of the purchase you can deduct.

Home Office Deduction

If you run a business out of your home, you may be able to utilize the home office deduction. The home office deduction is based on the square foot percentage of the home devoted to business use. Expenses that may be included are mortgage interest (not principal) or rent, insurance, utilities, repairs, maintenance, and depreciation.  However, these are not taken at full value, so you’ll need to run a calculation to determine the amount that is deductible.  There is also a simplified method that allows a rate of $5 per square feet, up to 300 square feet.  More information can be found here.  Though many are working from home these days, employees working for someone else are not eligible for this deduction.

Anytime you have questions about the deductibility of an expense applying to your situation, reach out to your accounting professional.