Small-business owners: you may be cheating yourself out of hundreds — or even thousands — of dollars in tax deductions because of lazy accounting.
Every year, businesses overpay their taxes because they’ve overlooked valuable deductions. These small businesses either aren’t aware of available deductions, don’t keep detailed records, or simply don’t want to do the time-consuming, itemized accounting.
There are dozens of tax breaks available to small businesses, especially home-based businesses. But you’re not going to find an itemized list on the Internal Revenue Service website of everything a small business can deduct — you’ve got to be in the know. Here’s our list of six critical tax deductions your small business may be missing.
1. Home office space
The first mistake home business owners make when doing their taxes is not deducting their home office. If you work from your couch or your kitchen table doubles as your desk, you won’t be able to deduct it. But the IRS allows home office deductions of $5 per square foot (with a cap at 300 square feet, or $1,500 per year) for space that you use on a regular basis exclusively as your office.
2. Utility bill
You can deduct a percentage of your heating and electric bill, including your mobile phone and home Internet bill. Accountants caution against claiming 100 percent business use for your phone or Internet, though, as you likely check personal emails on your work laptop and take personal calls on your cellphone.
3. Employee reimbursements
Most reimbursements related to employee expenses are deductible: lunch with a client, gas on a trip to conduct work research, or the cost of hotel accommodations for a business trip, for example. To deduct things like meals, gas, hotels, tips, and transportation, you must be organized and be able to show the expenses were truly related to your business. Keep your receipts and jot a note on the back describing the business purpose. Note that meals are deducted at 50 percent, and the IRS will be on the lookout for anything too extravagant. See IRS Form 463 for the specifics on the kind of reimbursement expenses you can deduct.
4. Office supplies
Computers, printers, software, iPads, and other office supplies are deductible, likely at a percent of the cost if you are using the equipment for home use as well as business purposes. And don’t forget the small things like ink toner, paper, and postage — those costs add up. For most office supplies, you can either deduct 100 percent of the cost the year you purchased it or deduct a portion of the cost over several years (usually five to seven years, depending on the type of supply).
Continuing education costs related to your line of work can be deducted. College classes or online courses that improve your skills can be deducted, as well as fees for trade shows, industry seminars, professional magazines, books, and DVDs. If a current license is required by law in your field, the training required to maintain your license can be deducted, too.
6. Health insurance
If you’re self-employed — and not eligible for a spouse’s employer-subsidized health care plan — you may be able to deduct health insurance costs for yourself and your family. Those medical and dental premiums lowers your adjusted gross income. If your business is paying health insurance premiums for employees, these amounts are also deductible.
7. Startup costs
The IRS allows you to deduct startup costs incurred before you were officially open for business — like money spent surveying a market and visiting potential business locations — but the guidelines are strict. If your total startup costs are $50,000 or less, you can deduct $5,000 in business startup costs (like employee wages and attorney fees) and $5,000 in organizational costs (like state organization fees and organization meetings).
You’ve still got plenty of time before the April 15 deadline to get your tax deductions in order. Tax laws are often updated, so always keep detailed records of your business purchases and check IRS guidelines or consult with a tax professional before filing your taxes. Take advantage of these deductions – as a self employed individual, you pay self-employment tax (SE tax) as well as income tax which can be as high as 15% of your annual income.
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