TAXES & ACCOUNTING • February 23, 2016
3 minutes Read
Many small businesses feel that high taxes are one of their top three issues that will hinder growth. When it comes to taxes, it’s important to stick to IRS rules—but that doesn’t mean you should overlook legitimate tax deductions that will lower your taxable profit. Here are 10 small business tax tips to help you make sure your small business is claiming everything that’s allowed this year.
1. Auto expenses. Do you use a car for company business? You can deduct car-related expenses in one of two ways. First, you could track your actual business-related car expenses , such as gas, tolls, insurance, garage rent, parking and registration fees and repairs. Alternately, you can deduct a standard rate for each mile driven. (That rate is 57.5 cents in 2015.) You can also include your business-related parking fees and tolls using this method. You may want to try both methods to see which one offers the better deal for a tax deduction. If you use your car for both personal and business purposes, keep a log of your miles traveled and use it to determine the percentage of time your vehicle is used for business. Then divide your annual mileage or auto expenses by that ratio. (So if your car is used 50 percent of the time for business, deduct 50 percent of your car’s annual mileage.)
2. Business use of your home. There are a variety of stringent tests you must pass to deduct a home office, but if you use part of your home regularly and exclusively for work, it’s worth a look. There are two different ways to calculate a home office tax deduction—one very simple and one, well, not—so take a look at the IRS’ Home Deduction guidelines for more information.
3. Costs of starting your business. The first year you’re in business, you can deduct up to $5,000 of business start-up and $5,000 of organizational costs, although the deduction is reduced if your total costs exceed $50,000. Any additional costs have to be amortized. Start-up costs might include an analysis of potential markets or products, advertisements, salaries and wages for employees being trained, travel to secure suppliers or customers and salaries for executives and consultants.
4. Professional fees. If you use the services of a lawyer, tax professional or consultant as a normal part of doing business, their fees are deductible on your Schedule C or C-EZ. The exception is tax preparation fees—of those, you can only deduct the cost of preparing the business-related part of your tax return, and the rest of the cost goes on your Schedule A (Form 1040) if you itemize.
5. Business meals and entertaining. If you take a current or potential client to lunch, dinner or drinks—or provide other amusement or recreation—you can deduct 50 percent of the cost if the activity took place in a business setting, or if the purpose of the activity was to conduct business (and you did). You also meet the test if the entertainment is associated with the business and takes place before or after a business discussion. For record keeping, make a note on your receipt of the specific business purpose.
6. Travel. If you travel for business, you can deduct transportation costs, taxis, meals, hotels, dry cleaning and laundry, faxes and tips, among other things. These deductions are allowed as long as your duties require you to be away from home for substantially longer than a normal day’s work.
7. Office supplies. Keep receipts for everything you purchase and use in the course of doing business, including paper, ink, books, business postage, and small items such as staplers and mouse pads.
8. Software. You can depreciate off-the-shelf software over a 36-month period, or deduct 100 percent of the cost in the year it was placed in service. This relates to software that is readily available for purchase by the general public, excluding databases.
9. Education. Did you take a class (or a series of classes) to maintain or improve the skills required in your present occupation? That’s deductible—even if you’re taking classes that could lead to a degree. It’s not deductible, however, if you need the education to meet minimum requirements of your present trade, or if it’s part of a program of study that will qualify you for a new trade. (Sorry.)
10. Advertising. Don’t forget about the little things you use to promote your business, such as newspaper ads, your website, business cards, holiday cards and sponsorships.
IMPORTANT INFORMATION: This is not investment, tax, or legal advice. Should you have questions, please consult your own attorney, tax accountant, or other appropriate expert having expertise in the area of your question or before making important decisions in these areas.