As a small business owner, you need every tax break you can get. Unfortunately, many owners simply don’t know the areas where they can receive tax deductions. Of course, some are more obvious than others, but knowing them all can lead to massive savings when it comes to paying taxes.
Give Your Children a Job
Hiring your children as part-time employees can be a great way to save during tax season. First, you can deduct their salaries from your income as a business expense. But the bigger bonus is that your children will only have to pay an income tax if their income goes over the standard deduction amount for the year. To read more on this handy deduction, check out this article from Nolo.
Startup Costs
Did you know that you may be entitled to a tax deduction for any costs that you sustained before your business opened? This must be claimed in your first year of business and you can deduct startup costs of up to $5,000.
Startup costs of more than $5,000 need 15 years to be amortized ratably. However, if startup costs exceed $50,000, well then a number of limitations will be applied.
Health Savings Account
Did you know that any contributions you make towards a health savings account are tax deductible? For this reason alone, all small business owners should start one! On the plus side, unlike IRA’s, a health savings account does not have a limit on the amount that can be contributed.
High-deductible health plans, as considered so by the IRS, allow for contributions to be made tax deductible. This is only up to $3,350 for single contributions and $6,650 for family contributions.
Later down the line, even when the owner of the business may not be covered by a high-deductible health plan, they may still use funds from the health savings account to cover qualified medical expenses. No tax applies to these qualified distributions or the earnings associated with them. On some occasions, funds in the health savings account can even be invested. This now makes the account an asset for long term growth that can help cover health costs down the line.
Retirement Fund
Using your retirement fund to lessen your taxable income just makes sense! Note that when you contribute to an IRA or a 401(k), both are tax deferrable. This is true up until the point that you start to make withdrawals from them. If you withdraw before you are 59½, you will pay penalty fees.
What exactly are you allowed to contribute to each fund? Well for a 401(k), you may contribute up to $17,500. This rises to $23,000 for people older than 50. For IRA’s the amount that can be contributed is $5,500, rising to $6,500 for people older than 50. By contributing these amounts, you significantly drop your taxable income. It should be noted that these contribution amounts may change in the coming years.
Energy Friendly Investments
It pays to have the environment at heart when running your small business. You can qualify for business energy investment tax credits by purchasing some energy-friendly systems.
These credits allow for savings on a number of technologies. In fact, for solar, fuel cells, small wind and PTC technologies, expect to save right up to 30% of your costs. This drops to 10% for geothermal, micro turbine or combined heat and power installations.
By reducing energy usage at your rented commercial space, you can also receive a tax credit. For example, by lowering power and energy costs by 16⅔ %, you made remove $0.60 per square foot of building floor area. This rises to $1.80 if you can reduce cost by 50%.
Bad Debts
Depending on your business and the kind of products you retail, you may be allowed to receive tax deductions on bad credit. For example, if you retail in goods, you are allowed to deduct the costs of goods that have been supplied to customers but never paid for. In the case of services, no deductions are allowed, even if a client does not pay their bill for services rendered.
Travel
Any travel costs for yourself or staff members, for example, the cost of air tickets or accommodation, can be fully deducted. Note, this must be substantiated to be claimed. Costs for local commutes are not deductible.
Rent on Business Property
Any rental costs, be it an office, factory or store are fully deductible.
Vehicle Expenses
All small businesses should get tax deductions for any vehicle that they use for business purposes. Here, you may claim for the cost of operating the vehicle. Note however, accurate records must be kept in this regard including any gas costs as well as servicing costs. Record keeping, however, can fall away if you choose to claim at 57.5 cents per mile, the IRS standard mileage rate.
Taxes
Note that real estate and any personal property that you own will allow for deductions on licenses and regulatory fees. Other taxes such as employer taxes, which includes the FICA and FUTA employer share, as well as unemployment taxes regulated by the state, are fully deductible.
For self-employed business owners, note that self-employment tax (normally half), is not considered a business tax deduction and should be reflected as an adjustment of gross income when it comes to submitting your personal tax return.
Insurance
Numerous insurance costs are fully deductible. These include malpractice coverage, owner’s policy as well as business continuation insurance.
When it comes to health coverage and small business, note these two rules. Any small business can qualify for a 50% tax credit for their premiums. Self-employed individuals may not claim a business deduction but should claim premiums when submitting their personal tax return.
Interest on Business Indebtedness
If a business takes out a loan, the interest on these loans, is fully tax deductible. With the recent expansion and ease of online business loans combined with tax deductions available for the interest paid, it’s a good time to expand your business.
Employee Benefit Programs
Education assistance, dependent care assistance, or other employee benefit program costs, as well as any contributions to qualified retirement plan accounts of your employees, is tax deductible. If you are self-employed, use a Form 1040 to claim personal deductions for contributions to your own retirement plans.
All of these tax deductions are there to help small business owners ensure that their businesses are well established. Make sure you make use of those that you never knew about and start saving on taxes now!
