How to plan year-end business spending to increase deductions, rewards
These tips will help your business charge the right expenses to lower your tax burden and boost savings
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As December winds down, your business focus may be on taking advantage of the holiday rush to boost sales. It’s also a great time to get a jump on planning for the April tax filing season by reviewing your deductible expenses for the year.
“Deductions are important because running a business can be expensive and deductions reduce your business’s taxable income,” says Josh Zimmelman, president of Westwood Tax & Consulting LLC in Rockville Centre, New York. “The IRS only taxes your net income (i.e., your gross income minus your expenses) but you’ve got to claim your deductions on your tax return.”
Claiming deductions can save your business money by trimming your tax bill. You can reap additional savings by charging deductible expenses to a business rewards card. These tips can help you plan your year-end spending strategy to maximize both deductions and rewards.
Year-end card rewards tax deduction tips
Know what’s deductible – and what’s not
To qualify for a deduction, a business expense must be both ordinary and necessary following IRS guidelines.
Simply, it must be helpful to operating your business and common to the type of business you own. Some of the most common deductible expenses include.
- Home office expenses
- Business use of a vehicle
- Insurance, including health insurance premiums if you’re self-employed
- Employee salaries
- State and local tax payments, including estimated quarterly taxes
- Rent expenses
- Interest payments
- Retirement plan contributions for both yourself and your employees
- Business travel expenses
Manisha Hansraj, tax expert and marketing associate at New York-based tax preparation service Rapid Filing Services LLC, says business owners should leave no stone unturned in exploring deductible expenses.
“Accounting fees, advertising, marketing, car expenses, depreciation and charitable deductions for business purposes are obvious,” says Hansraj. “They can often overlook expenses such as credit card convenience fees, discounts to customers, training for employees, gifts for customers or employees and newspaper or magazine subscriptions.”
Not every expense makes the list, however. The Tax Cuts and Jobs Act eliminated or reduced a handful of other business deductions.
“Employee transit and parking benefits are no longer deductible,” says Zimmelman. “The deduction of client entertainment expenses was also eliminated, although the 50 percent deduction for client meals is still in effect.”
Additionally, business owners “cannot deduct penalties and fines they pay for breaking the law, political contributions, membership dues, federal income tax payments, personal or living expenses and commuting from home to work,” says Hansraj.
Plan spending around business needs and cash flow
Consider the usefulness and timing of year-end business purchases carefully.
“Any assets needed for the business are always good purchases near the end of the year if you’re trying to lower your tax burden,” says John Blake, certified public accountant and partner with Hamilton, New Jersey-based accounting and advisory firm Klatzkin & Company LLP. But, “the assets must be placed in service prior to the end of the year to get the deduction.”
That’s something to bear in mind if you’re contemplating charging a larger purchase, like new computer hardware and software, an upgraded point-of-sale system or another piece of essential equipment. Spending to increase deductions or rewards makes sense when aligns with your business objectives.
Cash flow also matters. Once the holiday season ends, cash flow may slow down. If you plan to pay a year-end purchase off over time, you need to consider where those payments fit with your budget in the short- and long-term.
Additionally, you need to be aware of what the true return on investment ends up being if you’re paying interest over time. You don’t want the interest and finance charges to outweigh the value of any deduction or rewards you’re getting.
Match the purchase to the rewards structure
It goes without saying that if you’re charging year-end business expenses to a rewards card, your choice of card matters. The goal should be to generate the most rewards possible on business purchases. For example:
|If you're spending on...||Consider using...|
|Advertising and marketing services, including Google and Facebook ads||Chase Ink Business Preferred: Earn 3 points per $1 on travel, shipping, internet, cable, phone services and advertising purchases ($150,000 combined purchases yearly).|
|Business travel and computer hardware, software and cloud solutions.
American Express® Business Gold Card: Earn 4 points per $1 on the two categories where your business spends the most each billing cycle, up to $150,000 in combined purchases per year.
||Chase Ink Business Cash: Earn 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on internet, cable and phone services each account anniversary year
||Capital One Spark Cash for Business: Earn 2% cash back on all purchases.
If you have a personal rewards card that features rotating quarterly bonuses you may consider using it for year-end business purchases.
Chase Freedom, for example, currently offers a 5 percent cash back bonus on wholesale club, department store and Chase Pay purchases for the fourth quarter on up to $1,500 in combined purchases. Just remember to activate the quarterly bonus categories first.
Interest paid on both personal and business credit cards is tax-deductible, says Hansraj, “if it directly correlates to business expenses.” If you use a personal card for business spending, any interest paid on personal purchases would not be deductible.
You also can’t deduct the full amount of any business purchase if you used frequent flyer miles, points or cash back to pay for some of it, says Zimmelman. “It’s considered a discounted purchase, so you can report the reduction in purchase price and can only expense the amount that was paid for straightaway,” he says.
See related: Credit card bonus categories: What's ahead for 2019
Stack up rewards and savings
If you’re attempting to earn some extra rewards before the end of the year, take advantage of any stacking opportunities that come your way.
- Sign up for business discount programs such as Mastercard Easy Savings and Visa SavingsEdge, which allow you to earn savings discounts at partner merchants.
- Pair cash rewards card purchases with cash back sites and portals, such as Topcashback.com and Ebates, which allow you to earn additional cash back when you spend.
- Check your business and personal rewards cards for card-linked offers, which can apply savings discounts or additional rewards automatically at check-out. Amex Offers, for instance, features deals on dining, shopping and travel for American Express consumer and business card members. Chase recently launched Chase Offers directly on the Chase mobile app.
- Use your card’s online shopping portal to earn additional rewards. Rewards programs that offer shopping portals include American Express Membership Rewards, Chase Ultimate Rewards, Citi ThankYou, Marriott Rewards and Hilton Honors.
- Enroll in shopping, dining and travel loyalty programs which offer rewards when you spend.
These methods can help you add to your rewards total individually, but they become even more powerful when you combine two or more of them together
Document deductible business spending thoroughly
The most important rule to follow when charging deductible business expenses to a rewards card is maintaining good records.
“Business owners should be conscious to make sure they can substantiate their expenses,” says Blake. “Keep the receipts for credit card purchases where possible.”
Zimmelman says good record-keeping practices extend beyond maintaining paper or electronic copies of credit card receipts and credit card statements.
“It’s important to keep a clear track of your business expenses versus your personal expenses,” says Zimmelman. “Set up separate checking, savings and credit card accounts for your business so you don’t mix up spending.”
Take note of assets used for both business and personal purposes, such as a vehicle or cellphone, or a room in your home reserved for office space. Maintain mileage or call logs and keep copies of your internet, cellphone and utility bills on file.
“You can deduct a percentage of the expenses based on the percentage of use,” says Zimmelman, but only if you can prove it. “That’s why it’s so important to keep meticulous records.”
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