As the adage goes, you’ve got to spend money to make money. It follows that knowing how to maximize your deductible business expenses lowers your profit — and therefore, your taxes.
What can you deduct?
The income tax rules suggest that an expense must be “an ordinary and necessary expense of carrying on a trade or business that is paid or incurred in the tax year.” In practice, “ordinary” usually refers to expenses that are ongoing, such as fuel for the trucks or chemicals your technicians apply. It also can mean something you pay once, such as the installation of internet lines in your office. As long as these deductions are reasonable — which the IRS states is based on the facts and circumstances of each particular situation — it’s probably a safe deduction.
What records do you need to retain?
To deduct an expense, a pest management professional (PMP) should be able to provide evidence that supports what the deduction was for, as well as proves it was paid. The deduction should include a receipt or invoice, along with a canceled check or some other evidence that it was paid, such as a credit card receipt.
How long do you need to keep these records?
Generally, you will need to keep all records that support items on your tax return for at least four years, because the IRS may challenge your return for up to three years after its filing date. However, certain items need to be kept longer. Anything that may support a position on your tax return in the future should be retained until four years after that return is filed. An example would be a building you purchased for $500,000, and then paid $40,000 to put in a parking lot. You should save the paperwork and proof of payment for the purchase price of the building, as well as the parking lot, until four years after you sell the property and report a gain or loss on your tax return.
These three questions should get you thinking about tax reduction as the tax season approaches. Prudent PMPs should work with their certified public accountants (CPAs) to prepare an accurate tax return that maximizes deductions and minimizes taxes.
- Bad debts from sales or services (for those using accrual accounting)
- Bank fees on business accounts
- Car and truck expenses
- Commissions and fees
- Cost of goods sold/materials
- Employee benefits
- Employee wages
- Insurance (liability, auto, workers compensation, etc.)
- Legal and professional services
- Meals and entertainment (50 percent)
- Office expenses
- Pension and profit-sharing plans
- Rent or lease expenses
- Repairs and maintenance
- Travel expenses
Common non-deductible expenditures
- Country club, social club or athletic club dues
- Commuting expenses
- Federal income tax
- Fines and penalties incurred for violations of law
- Life insurance premiums (if the business or the business owner is a direct or indirect beneficiary)
- Personal expenses
- Tax penalty payments
Dan Gordon owns PCO Bookkeepers, an accounting and sales and acquisition consulting firm that caters to pest management professionals nationwide. For more information, contact him at firstname.lastname@example.org.