In my most recent blog, I talked about different small business structures and some of the tax implications for each, this week I will go over tax considerations, specifically, common deductions available for your small business. IRS rules and regulations regarding deductions for business may seem big and scary, but "pay no attention to the man behind the curtain!" There are many easy to find deductions available to help you pay less tax by reducing your taxable income -- you simply need to know about them and how to track them. As soon as you start thinking about starting a business, you should begin tracking your expenses -- whether you use an app, a notebook or go the old-school route and use shoeboxes, be sure to keep receipts and cancelled checks.
Start-up Expenses
Most of the costs of evaluating or investigating the creation or acquisition of your business, are considered start-up costs and you can deduct up to $5,000 in the first year and amortize the balance over five years. Allowed startup costs can include: analysis or survey of potential markets, products, labor supply, ads for the opening of the business, salaries and wages for employees in training, and their instructors, travel costs for securing prospective distributors, suppliers or customers, and salaries and fees for executives, consultants or similar professional services.
Home Office Deduction
"There's no place like home" and many taxpayers work from their home to take advantage of the convenience and benefits of doing so. But using the Home Office Deduction on a tax return can be tricky. IRS allows taxpayers to deduct expenses for a home office if the taxpayer and the space meet certain requirements. The taxpayer must be using the space as the primary space to do office work, visit with clients, make appointments, and handle the business of the year. In addition, the space must be solely used for business purposes. So, it can't be used as an extra bedroom, the dining room, or the kids project table as well.
Depreciation
New businesses generally have large expenses for tools, computers, and equipment and existing businesses often have to purchase replacement equipment and furniture. The tax code does not allow you to write off the cost of these items in full as an expense of the business; however, it does allow you to take a percentage of the cost over a pre-determined life of the asset and to an immediate deduction of up to $25,000 of the cost of the assets the first year they are used in the business. Although, the concept of depreciation is simple, selecting the correct asset type, depreciation method, and taking advantage of bonuses can be more complex. The IRS offers A Brief Overview of Depreciation on their Website.
Licensing and Professional Fees
You can claim a deduction for any licensing or registration fees required for your business. And professional fees you pay, such as legal, bookkeeping, tax preparation for the business, and even membership fees to professional organizations are deductible. If you pay a consultant to do an analysis of your business or to do some work for you don't forget to deduct that fee.
Health Insurance
Only health insurance expenses paid for non-dependent/spouse employees are allowed as a deduction directly from your business. To be eligible for the deduction neither you, nor your, wife may be eligible for employer sponsored health insurance coverage, even if you don't use it. If you receive your health insurance through your state Marketplace and are eligible for the health insurance tax credit as well, your deduction is limited to the lesser of the out-of-pocket premium paid less any credit received on the tax return. Even though your business may not deduct your personal health insurance costs, if you are self-employed, you may be able to deduct any out-of-pocket costs for health insurance for you and your family directly on your Form 1040.
Retirement Plan
Not only are you eligible to set up a special small business retirement plan for your employees, you may also participate in this plan. If you make contributions to a retirement plan for your employees you may deduct these contributions from your business income. If you participate in your retirement plan, you may claim the contributions you make as a deduction on your Form 1040.
Meals and Entertainment
You may claim fifty percent of the meal expenses you pay for your employees, yourself, or a prospective client. In addition, you may claim a deduction for fifty percent of the cost of entertainment for your clients as long as you, or an employee, is present and the entertainment is part of a business contact with a perspective or current client.
Mileage and Travel
Travel related to your business for you and your employees is deductible. If you are using a form of public transportation, rental cars or a plane, train, or bus, you can deduct the full travel cost. Your lodging costs are also deductible, however your meal expenses are still limited to fifty percent of the cost. If you are using your personal vehicle, you must keep a log for the full year that includes your beginning and ending mileage for the year and all tips, personal and business. You can choose to also keep track of all expenses for the year, gas, oil, maintenance, repairs, etc. and claim the business percentage of those expenses, or you can claim the standard mileage rate. There are some excellent Apps available to track auto-related expenses.
Cell Phone and Internet
The business percent use of your cell phone is deductible. Just like the car, you need to keep a log of your calls. We recommend keeping the detailed monthly bills with your receipts.
These are just a few of the deductions available for your business. There are many more like; education, publications, and software -- to ensure you take advantage of every deduction available speak with your tax professional.
Although it is a lot of work owning and running a small business the rewards range from personal satisfaction to potentially great financial return for your efforts. To be more successful, you need every advantage you can find, like taking all of the tax deductions and benefits allowed under the law. Staying organized, tracking your expenses, and knowing where your money is being spent will allow you to keep more of your hard-earned money.