Transforming Personal Expenses Into Business Deductions (w/ Morgan Holmes)
Converting personal expenses into legitimate business deductions is a crucial tax-saving strategy for MSP (Managed Service Provider) business owners. In our latest Stride Services webinar, tax expert Morgan Holmes, CPA, shared valuable insights into how MSPs can turn everyday personal expenses—such as home offices, vehicles, and travel—into deductible business costs. Below are the key takeaways from the session.
1. Home Office Deduction: Turning Your Workspace Into a Tax Benefit
As remote work has become more common, the home office deduction has gained relevance for many MSP owners. Morgan explained that to qualify for this deduction, the space must be regularly and exclusively used for business purposes. There are two main methods to calculate this deduction:
- Simplified Method: Deduct $5 per square foot, up to a maximum of $1,500.
- Regular Method: Calculate the business use percentage of your home by dividing the square footage of your office by the total square footage of your home, then apply that percentage to home-related expenses such as mortgage interest, property taxes, utilities, and rent.
Key Considerations:
- Ensure the space is used exclusively for business—no personal use allowed.
- Proper documentation of square footage and home expenses is essential to validate the deduction in the event of an audit.
2. Vehicle Expenses: Deducting Your Miles and More
If you use a vehicle for business purposes, you can deduct either the standard mileage rate or actual expenses:
- Standard Mileage Rate: Multiply your business miles by the IRS mileage rate (currently 65.5 cents per mile for 2023).
- Actual Expenses: Deduct a portion of all vehicle-related expenses (gas, repairs, insurance, depreciation) based on the percentage of miles driven for business.
For businesses that own fleets or use vehicles heavily, the actual expenses method typically provides a larger deduction, especially due to the upfront depreciation of the vehicle.
Key Tip:
- Track your mileage consistently using a mileage log or app like MileIQ to ensure accuracy and protect your deductions in case of an audit.
3. Accountable Plans: A Must-Have for Employee Reimbursements
Morgan emphasized the importance of accountable plans for reimbursing employees for business expenses. This document outlines how a company reimburses employees for business-related expenses such as travel, home office use, and vehicle expenses.
Without an accountable plan in place, any reimbursement could be considered taxable income to the employee. By having a written plan, businesses can ensure that reimbursements remain tax-free to employees and fully deductible to the business.
Key Takeaways:
- Reimbursements under an accountable plan must be submitted within 60 days and any unused funds must be returned to the employer.
- Having a formal plan protects the business in case of an IRS audit and prevents employees from being taxed on reimbursed expenses.
4. Business Travel: Maximizing Deductions on Mixed Trips
Business travel expenses can also be deducted, but there are strict rules when trips are a mix of personal and business activities. Morgan explained:
- If more than 50% of the trip is for business, you can deduct travel costs (airfare, hotels, meals) related to the business portion of the trip.
- Personal days on the trip must be excluded from the deduction, but business-related travel costs (such as airfare) remain deductible if the majority of the trip is for business.
Key Insight:
- Business-related travel, meals, and incidental expenses are deductible, but careful documentation is needed to prove the business purpose of the trip.
5. Avoiding Common Pitfalls
Throughout the webinar, Morgan highlighted the importance of maintaining accurate records and ensuring that personal expenses are legitimately transformed into business deductions.
Key Takeaways:
- Documentation is essential: Keep track of all business use, whether it’s for home offices, vehicles, or travel.
- Consult a tax expert to ensure compliance with IRS guidelines and maximize your deductions.
Final Thoughts Turning personal expenses into business deductions can be a significant tax-saving strategy for MSP owners, but it requires careful documentation and adherence to IRS rules. By understanding the opportunities available through home office deductions, vehicle expenses, and accountable plans, MSP owners can optimize their tax strategies and keep more money in their business.
For further details or to revisit the discussions from our webinar, watch the full video by clicking the button below or contact our experts directly at Stride Services for personalized advice.
[Watch here: STRIDE LIVE Transforming Personal Expenses Into Business Deductions]
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This Stride Live Webinar is hosted by Stride Services. Stride is a comprehensive financial solutions provider, specializing in outsourced bookkeeping, accounting, tax, and advisory services for Managed Service Providers.
If you’re interested in being a featured guest on our Live Webinars or if there’s a subject matter expert you’d like us to interview, please CLICK HERE and let us know!
Show Notes + Transcript:
Casey Seaborn: Email: casey.seaborn@stride.services
LinkedIn: https://www.linkedin.com/in/casey-seaborn-stride/
Morgan Holmes: Email: morgan.holmes@stride.services
LinkedIn: https://www.linkedin.com/in/morganfholmes/
Webinar Transcript:
Stride Live: Transforming Personal Expenses Into Business Deductions (transcript)
