Where to Look for Hidden Tax Deductions (Even Though 2018 is Over)
It’s that time of year again! Time for business owners to get together with their accountants to review the previous year’s taxes. If you’ve already started crunching your 2018 numbers, and don’t like what you see, there are still ways to uncover hidden tax deductions – which could potentially save you thousands.
You can recategorize expenses, find ones you forgot about, and even invest money now that impacts your previous year’s tax posture. Ready for the big reveal? Here are the top 6 hidden tax deductions for businesses…
(Quick note: The following hidden tax deductions are meant for “pass-through” entities such as LLCs, sole proprietorships, S-corps, partnerships).
1) Client Lunches: Clearing Up the Confusion
You may have mastered the art of the business lunch, but did you know it’s one of the top hidden tax deductions? At the start of 2018, there were rumors that the Tax Cuts and Jobs Act eliminated the 50% deduction for client meals. That is simply not true.
Hopefully, you used these 7 tips for hiring an accountant – and that accountant let you know that client meal deduction is still on the table. If not, well, now you know that it’s one of the top hidden tax deductions for businesses in 2018.
2) Hidden Tax Deductions Under Your Car Seat
If you drive a vehicle, you may be sitting on some hidden tax deductions – literally. Look within your vehicle for parking garage and parking spot receipts from business meetings you attended. Are you in a big city where it’s customary to tip parking garage attendees? You can deduct those tips as well.
Worried about missing out on these hidden tax deductions because you didn’t save receipts? Or tally up tips? There’s an easy fix. Pull up your calendar. Look at every meeting you drove to, and create a new chart in Excel. If you paid parking meters, find out what the meter cost is in each city the meeting was held in. Add your tips for parking garages.
Think those tips are no big deal? Think again. If you tip the parking garage attendee $5 and you attended 30 meetings last year that required garage parking, that’s $150 in hidden tax deductions.
3) Hidden Tax Deductions: The 20% QBI Deduction and SEP IRAs
By now you’ve likely heard that pass-through businesses – from sole proprietorships to S-corps – are eligible for an automatic 20% deduction on their qualified business income. So, this really isn’t one of those hidden tax deductions.
However, the IRS isn’t giving everyone that 20% deduction. In fact, if your qualified business income exceeds $157,500 (if filing single) or $315,000 (if filing jointly), you may only get a portion of that 20% deduction – or none at all!
The tips in this article on hidden tax deductions can help you lower your QBI to avoid the “danger zone” of $157,500 and $315,000. But one of the biggest and best ways to uncover hidden tax deductions will also help you plan for retirement at the same time. Meet the SEP IRA (simplified employee pension individual retirement account)…
When you set up a SEP IRA, you can contribute up to 25% of your net business income (that means you have already deducted business expenses, half of your self-employment tax, and your SEP contribution) up to $56,000 for the tax year 2018.
Best of all, it’s not to late to take advantage of a SEP IRA – one of the biggest hidden tax deductions – because you have up until Tax Day to set one up for the previous tax year. So if it’s March 30th, 2019, and you just discovered these hidden tax deductions, you could open a SEP IRA, make a large contribution, and reduce your taxable income by thousands of dollars.
There are other tax implications to be aware of when setting up a SEP IRA, so review these SEP IRA guidelines before making your move.
4) Hidden Tax Deductions for Medical Costs
Are you self-employed, single, and paying for health insurance through your business? Or does the health insurance you pay for cover your spouse and/or dependents? Good news, your health insurance premiums can be deducted to lower your AGI (adjusted gross income). However, like all hidden tax deductions, be very careful about the IRS rules! If for any month of the previous year you were eligible for an employer-provided insurance plan – or one was available to you through your spouse – you cannot deduct health insurance premiums for that month.
The TCJA brought in some big changes, but the Act kept a few things the same – like the ability for Americans to deduct healthcare expenses if they meet or exceed a set percentage of their AGI. In 2018, the threshold was 7.5% of your AGI. However, in 2019, this threshold increases to 10% of your AGI. Use this guide to understand whether or not your medical expenses are truly hidden tax deductions or not.
5) Did You Pay Your Kids for Business-Related Tasks?
Yes, those could be hidden tax deductions. If you paid your child to help you with any business-related tasks in 2018, that’s a deductible expense…even if the child is not of working age. Going forward, you should formalize those payment using checks or automatic deposits. However, if you took cash out of your business account to pay one of your children, note the date, time, and task – and by all means, add it to your list of hidden tax deductions. Also, paying your child as an employee can save you additional dollars in social security taxes. See the 3 amazing benefits of hiring your kids from a tax posture and financial perspective.
6) Home Office Deduction
Again, this isn’t really one of those hidden tax deductions. As a business owner, you already know about it. But do you take it? You should. Here are Robert P Russo CPA, so many of our clients say they’ve “heard” it’s an IRS audit red flag. If you are legitimately using a portion of your home for business purposes, there’s nothing to fear – and you should be taking the deductions.
In a perfect world, you would have been watching for hidden tax deductions throughout 2018. But it’s not too late to improve your tax posture. Talk to a qualified CPA about your options: from opening a SEP IRA to tips for preparing documentation for home office use. Then, start making a plan for 2019. Cheers to a prosperous new year!