Everyone likes taking deductions on their taxes. These tax breaks are critical for lowering what you owe every year and the more deductions you can claim, the less you'll have to pay to Uncle Sam. For small business owners, there is a wide-range of deductions that are available for decreasing your taxable business income. When there is less income that is subject to being taxed, your tax bill can drop dramatically.
How does one become eligible for tax advantages such as these? They are typically available to small business owners who have incurred certain types of expenses, paid for insurance premiums, bought supplies, and taken a hit on the value of various forms of property. Even the place where you physically conduct business each day can earn you a tax break.
Your accountant can walk you through every deduction you have coming to you based upon the unique financial situation of your small business. But no matter what deductions you decide to claim, it's imperative that you have good book-keeping practices as you may need to show corresponding paperwork to back up every claim. Any good tax preparer will insist that you keep excellent records to avoid a potential audit.
Tax season is just around the corner and that means identifying every deduction. Here are six of the most commonly overlooked tax breaks that small business owners fail to claim year in and year out. Don't make the same mistake, as you could be paying more than you need to be on your tax bill for this year.
1. Home Office Expenses
Among the most widely overlooked tax breaks is the home office deduction that allows you to take any expenses incurred for the portion of your home that is being used for business. This is a highly beneficial tax break if you maintain a home office for the purposes of conducting normal operating business each day.
But there are restrictions. The eligible expenses can only be incurred on parts of the home that are used for business purposes. If you work at your kitchen table you cannot claim that as a home office because that is an area that you use for both personal and professional use. A "home office" in this regard is anywhere that is reserved separately for conducting business each day.
Your tax preparer will be very specific when asking you if you qualify for the home office deduction and you will need to prove that any place you are calling a home office actually fits the bill.
2. Startup Costs
The money you spent to start your business may also be deductible from your taxes. These costs cover the whole spectrum of standard business fees such as marketing expenses, legal costs, accountant fees, travel expenses, even money spent training and paying your employees.
The tax law dictates that you can deduct as much as $5,000 in startup costs and another $5,000 in organizational expenditures. These both phase out if and when either of the two types of expenses reaches $50,000.
3. Automobile Expenditures
If you use your own automobile for business purposes, you might be eligible to deduct any costs associated with driving and maintaining the automobile. Better yet, you have a few options as to how you can calculate how much to deduct.
But much like with the home office deduction, you need to be very specific about figuring out your costs for personal and professional use and only deduct what you qualify to claim while you are operating the vehicle for business purposes. Otherwise, you could run into some trouble with the IRS.
4. Book-keeping on bad debt
If you are carrying debt associated with your business that you will likely never be able to collect, the tax code will let you write that off as a deduction. These are typically monies that were never received on an unpaid account, a loan that was never repaid, money owed by suppliers, wages given in advance to an employee that no longer works for you, and so on.
Basically any money that you will probably never see in your hand qualifies as a bad debt and when you audit the books to see how much debt you are owed that has not been collected, these amounts can be taken as qualifying deductions.
5. Miscellaneous Expenditures
You had to find a tax preparer and start paying for that person's services or you had to hire a lawyer, maybe even pay to train yourself or your employees. All of these expenditures may qualify as deductible for the tax year in which the money was paid.
There are some limits, of course, and your accountant can walk you through those restrictions.
6. Carryover Deductions
Finally, this is a deduction that is overlooked all too often because sometimes taxpayers simply forget about them. A carryover is any money that qualifies for a deduction as a carryover to be applied to your taxable income in the future.
These are typically applicable when you are itemizing your actual expenses and do not apply for the simplified methods of claiming your deductions. But everything from capital and operating losses to some of the previous deductions on this list might apply for future or even past tax deduction, based upon the type of expense or loss incurred and the tax bracket you expect to fall under down the line.
