It's tax season again, and we've compiled ten deductions we think all small business owners should review. Don't file before reading this!
It’s that time of year again.
The IRS officially opened tax season on January 19th, and business filers are hurriedly collecting receipts and itemizing expenses in the hopes of getting the biggest refund possible.
And while most businesses report handing their taxes off to a professional, 15 percent of all business filers take care of their taxes in-house.
For those self-starters rushing to beat the April 18th deadline, here are ten deductions you should make sure to look at this year.
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1. Home Office
Home offices are one of the most common deductions, but can also be the most confusing.
As of 2013 there are two methods for calculating these deductions; the simplified option, which allows you to deduct $5 per square foot of your office, up to 300 square feet, and the old method, which is a much more complicated formula based on the size of your office, the depreciation of your house, and other common expenses.
Home office expenses are one of the most common flags for an audit, though, so whatever option you choose, remember that you can only deduct your home office if it is used regularly and exclusively.
That means you can’t claim the guest room you occasionally check e-mails in.
2. Car Use
Cars are a pretty standard deduction as well, but a lot of people are confused as to what, exactly, they can claim.
Unfortunately, you cannot claim mileage related to your commute, getting to and from the office is considered standard personal use, but you can claim any mileage racked up in the course of running the business.
That means if you head out to meet clients, or get supplies, that mileage could be deductible.
3. Business and “Hobby” Expenses
The IRS treats businesses and hobbies very differently. You can use business losses to lower your tax bill, but not hobby-related expenses, so the IRS tends to keep a close eye on new business deductions.
In order to qualify as a business, a venture has to either make money, typically during at least three of five consecutive years, or have a provable plan to make money.
Otherwise, your business may be dubbed a hobby.
4. Start-Up Costs
You can deduct costs incurred while starting up, or investigating the possibility of starting up, a new business.
That means, if you paid for any pre-opening travel, advertising, and employee training, that could lower your tax bill.
You can even deduct costs related to incorporating or forming a partnership.
5. Education or Professional Improvement
Business owners fill a lot of different roles in their own company, which means we typically take different classes, or buy books, to help us become more efficient.
The IRS actually recognizes these efforts at self-improvement, and allows filers to deduct expenses relating to maintaining or improving skills needed for work.
Just remember the education has to improve skills needed for your current job, not qualify you for a new one.
So a “Bookkeeping for Small Business Owners” course may count, but a semester-long CPA-training session probably won’t.
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6. Insurance Premiums
Business owners who are self-employed, don’t have any employees, and did not qualify for another group plan either under their spouse or another employer, may deduct health and dental premiums under the Affordable Care Act.
If you do have employees, though, you can still get a tax credit of up to 50 percent of your premium costs, as long as you bought the plan through SHOP.
7. Your Children’s Wages (if They Work for You)
Family businesses are, by definition, run by families.
So if you own one and you brought on your kids to help, and they are under 18, you can actually deduct any wages paid to them as a business expense, as long as your company is a sole-proprietorship, or a partnership if both parents are owning partners.
Better yet, those wages aren’t subject to FUTA or social security withholdings either.
8. Cell-Phones and Computers
You cannot deduct the personal use of any cell phones or computers, but the IRS thankfully recognizes that we use our devices for a mixture of business and pleasure.
As a result, you can deduct whatever percentage of your device usage is related to running your business.
It’s a good idea to keep track your business and personal usage, like with an itemized phone bill, just so you know exactly what percentage of your use is deductible.
9. Service Fees
Back before credit processing companies began turning iPads into portable point-of-service systems, most business owners knew to deduct the substantial service fees as standard business expenses.
But now fewer business owners seem to realize that, though the fees have gone down, they are still deductible.
Don’t overlook the costs for standard services necessary to run your business, fees from credit card processing companies, banks, and payment services are usually deductible.
10. Section 179
According to the NSBA Small Business Tax Survey, 44 percent of business owners feel Section 179 Deductions were the most important stimulants to business growth.
Congress thankfully voted to extend Section 179 Deductions at the very end of last year, applying them retroactively throughout 2015.
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That means businesses can deduct qualifying purchases up to $500,000. If your business bought office furniture, machinery, computers, signage, off-the-shelf software, or any qualifying property, and put it into business last year, make sure you take advantage of this deduction.