The time to prepare for small business taxes is long before tax day arrives. Many of the actions you can take to lower your tax bill—identifying deductions, gathering documentation and incurring expenses—need to happen before the year comes to a close.
Although the end of the year is hectic with holiday business tasks and other responsibilities, it pays to make taxes a priority. While you should rely on your tax preparer for the specifics about what rules apply to your business and when payments are due, you can help with the effort by understanding common tax deductions. This knowledge may help you to identify, track and claim the deductions for which your business is eligible.
Review these common tax deductions to identify the ones that may be available to your company:
A wide variety of expenses related to running your small company can be deducted from the taxes it owes, which can dramatically lower the amount you actually need to pay on tax day. The IRS defines legitimate business expenses as those that are “ordinary and necessary” and common business deductions include: start-up expenses; auto expenses; purchases of office supplies and furniture; expenses related to staff and consultants, rent, and travel; interest on business loans or other business credit; technology investments; and moving expenses. You can find an overview of IRS-approved business expenses here http://www.irs.gov/publications/p535/ar01.html. http://www.irs.gov/publications/p334/
Equipment and software purchases
The cost of technology, machinery and other equipment you buy to use in your business may be deductible, at least in part. The amount that is “allowable” in any given tax year tends to vary, so check with your tax preparer to learn about current tax law. Eligible purchases may include computers, furniture, manufacturing equipment, vehicles and certain business software. This deduction is key for small companies and you may want to talk to your tax preparer about making purchases before year’s end to gain the deduction for that tax year.
Any well-run company incurs plenty of insurance costs, and many of these may be eligible deductions for your small company. Potential insurance deductions include premiums related to liability, health, malpractice, workers’ compensation and property coverage. Commercial vehicle premiums and life insurance coverage for officers and employees may also be deductible, though business type and location dictate eligibility, so check with your tax preparer.
Your home office
The IRS has specific rules that govern whether or not the home office deduction is available to your business. Generally speaking, an individual homeowner (or renter) is eligible to take the deduction if his or her home office meets any of the following requirements: it is your principal place of business; you use it regularly and do not have another location; you meet clients or customers there; or you use it to store inventory or samples. Check with your tax advisor about whether you qualify and how to calculate this expense if you work from home.
Fees for seminars, classes, books and online learning can often be deducted since sharpening your skills and the skills of your team is important for staying one step ahead. Also ask your tax preparer about costs associated with professional group memberships or trade groups you are part of. Traveling to seminars and conferences put on by these groups—whether local or far flung—can also generate expense deductions.
Retirement plans are important for financial planning, employee recruitment and staff retention. They can also provide a tax deduction for your small business. The cost of plans, such as 401(k), SEP IRA or SIMPLE IRA, and others, has the potential to provide great benefits and a hefty deduction for your small company.
Business tax deductions represent a great opportunity for you and your company to save precious resources that you can put toward other business expenses. Identifying the deductions you are eligible for can help you achieve the greatest savings.