Getting Your Small Business Tax Return Ready by Knowing Your Deductions
Tax time is almost here! If you’re a small business, you may be wondering about the tax deductions available to you. In recent posts, we’ve discussed the Section 179 deduction, cost segregation for landlords, and charitable donation deductions.
Following are several other deductions your small business may be eligible for.
Car and Truck Expenses
If you use a vehicle like a car, truck, or van, the cost of operating that vehicle for business purposes is deductible. Like most deductions, however, you’re only eligible if you keep good records – you’ll need receipts for oil changes, maintenance, and gasoline/diesel.
Rent on Machinery and Equipment
Any fees you pay to lease or rent items used in your business are fully deductible. (Keep receipts!)
Rent on Business Property
If you rent space – an office, storefront, factory, or other facility – the cost is fully deductible.
Home Office
Some personal expenses of a home are deductible as a business expense if the home is used regularly and exclusively as the principal place of business and/or as a place to meet or deal with clients.
Both direct costs – painting a home office, for example – and indirect costs – such as the percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use – are eligible for a deduction.
Salaries and Wages
If you’re a sole proprietor, partner, or LLC member, the money you take from the business isn’t considered a salary and is therefore not deductible. Employee wages, however, are deductible.
Contract Labor
The cost of independent contractors is deductible. This requires the use of Form 1099-MISC for any contractor being paid $600 or more (Technically, if you pay the contractor with a credit card or PayPal, the processor is required to issue them Form 1099-K, but it’s still a good idea to send Form 1099-MISC to CYA.)
Supplies
Items used for business, such as cleaning supplies for a housekeeping service, are fully deductible. Again, only with proper documentation!
Utilities
Utilities include, but are not limited to, electricity for your facility and your cell phone charges. If you claim a home office deduction (as stated above), the cost for your first landline is not deductible; a second landline, however, is considered a deductible utility cost.
Taxes
You can deduct licenses, regulatory fees, and taxes on both real estate and personal property. You can also deduct your employer taxes, including your share of FICA, FUTA, and state unemployment taxes
If you’re a self-employed business owner, however, the deduction for half of your self-employment tax can’t be used as a business deduction; rather, it’s considered an adjustment to the gross income on your personal tax return.
Repairs
The cost of ordinary repairs/maintenance is deductible. (Receipts again!) Costs that enhance a property’s value must be capitalized and recovered through depreciation, which you can read about here.
Commissions, Advertising, and Legal/Accounting Fees
All are fully deductible.
Meals and Entertainment
You can only deduct up to 50% of these costs. Also, you can only claim the deduction if you substantiate the expense (see IRS Publication 463).
Travel
If you or your employees travel out of town for business, the costs for transportation and lodging are deductible. Similar to the meals and entertainment deduction, you must first meet substantiation requirements in this category as well. Also, local commuting costs aren’t deductible.
Interest on Business Debt
Interest on business loans, such as a line of credit, is deductible.
Mortgage Interest
If you own property, you can deduct mortgage interest. And, unlike interest on a personal residence mortgage, there’s no cap on the size of business mortgage loans on which you can claim interest.
Employee Benefits Programs and Qualified Retirement Plans
If you pay for employee benefit programs such as education assistance and dependent care assistance, the costs are deductible, as are contributions to employees’ qualified retirement plan accounts.
Continuing Education
The cost of pursuing additional education is deductible; the IRS’s Lifetime Learning Credit program means you can claim up to $2,000 for qualified education expenses per year.
Social Security
As a small business owner, you pay 15.3% of your income to cover social security and Medicare taxes, the cost of which is deductible.
It’s unlikely that your small business will be eligible for all these deductions, but it’s worth knowing the possibilities and researching them if you’re filling out your own tax forms this year. If you’re using a CPA for your taxes, it’s still worth knowing – two heads are better than one, as they say.
And I know it seems like we’re beating a dead horse, but honestly, it can’t be overstated: keep good records! Keep receipts! All year! Starting now!
For a CPA recommendation to handle small business tax needs, or for other money matters, please contactHoldfast Wealth, and don’t forget – you have extra time to get your taxes filed this year; they aren’t due until April 18th!
