One of the small changes in the new tax law could impact small business owners in a big way. If you’re like many businesses you pay for some business expenses personally. Nothing wrong with that, but you need to be careful how you handle the accounting or you could lose the business deduction entirely.
Under the old law, if you failed to reimburse your business expenses, you could still deduct them on your personal tax return as a miscellaneous deduction subject to 2% of Adjusted Gross Income. This wasn’t the best way to do it since you were going to take 2% of your AGI off the total. In other words you weren’t receiving the full deduction. But you still received something.
Under the new law, these miscellaneous deductions have been repealed. Which means you can no longer deduct unreimbursed business expenses on your personal return. It should be noted that this doesn’t generally apply to unreimbursed expenses from a Partnership, just Corporations.
So what is the best way to make sure you receive the full deduction? Have the company reimburse you for your business expenses that you pay for personally, in timely manner. This should be no different than the way you would with employees. Complete an expense reimbursement report, and receive the reimbursement on your paycheck or in a separate payment.
Even better, pay all of your business expenses through the business! Ideally, you should have a credit or debit card that is solely for business purposes. No mixing of personal and business expenses. Not only is this a potential source of errors in accounting, but IRS auditors look at the practice as an opportunity to question ALL of your business deductions, not just the personal items.
Don’t wait to see how the tax law will affect your business! Schedule a FREE consultation today to learn how we can help you.