Don’t Forget These Small Business Tax Deductions
For a small business owner, maximizing your tax deductions is like money in your pocket. Every time you find one you can use it reduces the amount of income you must pay taxes on. It’s worth your time to make sure you’re not forgetting any of the good ones.
- Mileage: If you drive your personal vehicle much for business purposes, this deduction can be a gold mine. You can deduct actual expenses – which means you have to keep receipts for everything – or simply track the business mileage you drive and claim the government rate of 57.5 cents a mile. Believe it. This adds up quickly.
- Home Office: The home office is a sometimes poorly understood deduction that is actually quite straightforward. If there is a part of your house you use exclusively for business, measure it in square feet and divide by the square footage of the total house. This gives you the percentage of office space versus total space. In recent years the IRS has offered a simplified method for deducting a standard rate per square foot which is easier than calculating percentages of rent, mortgage, insurance, electricity, etc.
- Software and Subscriptions: That new high dollar software you had to buy for the business last year? It’s deductible in its entirety the first year. Same with office equipment like computers, copiers, fax machines, and furniture. You may choose to depreciate these types of purchases over five years (which just means deduct one-fifth of the purchase each year) or take it all at once. Small business owners sometimes forget that business and industry-related magazine subscriptions are legitimate business expenses also. Keep track of this stuff. It all adds up.
- Travel Expenses: The IRS has a category of deductions called meals, entertainment, and gifts. If you travel much, it behooves you to be acquainted with how it works. The cost of living on the road, hotel, airfare, taxis, dry cleaning – it’s all completely deductible, so you might as well stay in the Ritz. It’s just as legitimate a lodging deduction as the No Tell Motel. Be aware that meals are only 50 percent deductible, as are client gifts such as a bottle of fancy wine.
- Insurance and Retirement: The IRS realizes that the self-employed often end up paying the entire cost of things like health insurance and retirement contributions. You guessed it. There’s a deduction for that. In general, these costs are fully deductible, but pay attention to a few caveats lest you be audited. You can’t take the health deduction for more than your business showed in profit, and you can’t claim a deduction if you are covered by an employed spouse’s coverage.
- Telephone: Business telephone expenses used to be a lot easier to discern. All you had to do was look at your monthly landline phone bill and pick out the long distance calls related to business. These days, the ubiquitous cell phone and its associated unlimited plan has largely done away with the idea of racking up per-minute phone charges. With a cell phone you’re expected to make a good faith estimate of what percentage of the time you use it for business, then deduct that percentage of the bill. Alternatively, you could install a second land line, only use it for business, and deduct the entire expense.
- Wages: You can’t deduct wages paid to yourself as a sole proprietor, partner, or LLC member – this money is termed a “nondeductible draw” by the IRS, but every bit of salary paid to an employee or independent contractor reduces your tax burden. Depending upon how many workers you have, this could add up to a considerable deduction so don’t let it slide just because it’s a hassle to track.
The Bottom Line
Though this article covers a good number of critical small business tax deductions, there are many more. Rent on your business location, utility expenses, sales tax paid – the list goes on and on. In order to make sure you’re not missing out on a legitimate deduction, you probably need to sit down before doing your taxes and sift through every area of expense in order to evaluate whether or not it counts. It’s hard enough to make a living running a small business without letting opportunities to keep more of your money through tax deductions slip through your fingers. Be patient in your personality, persistent with your record-keeping, and profitable with your work.
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