Do you have a small business? You can take advantage of these ten deductions to reduce your taxable income.
The legal reduction in taxable income isn't as thrilling as winning the lottery, but it is almost close, and it is much more likely to happen. If you have a small business, you can take advantage of these deductions. Major deductions include home office expenses, health insurance premiums, and start-up costs.
Home Office Expenses
These expenses are one of the most common deductions for small businesses. Due to its prevalence, the Internal Revenue Service (IRS) devised a simplified option in 2013 to calculate the Home Office expense deduction. You can now choose between standard and simplified deduction calculations.
The default option asks you to calculate your home business's percentage to your home and then apply that percentage to all eligible expenses, such as insurance, mortgage interest, and utilities. To be able to do this, you will need to keep detailed records of all relevant expenses.
The simplified option lets you take a standardized $5 per square foot of your home office space, up to $1,500 or $300 square feet deduction as a home office deduction.
Start-up Costs
The costs of running a small business can be deducted up to $5,000 each. The eligible start-up cost is reduced by the sum of the total initial or organizational costs exceeding $50,000; the rest must be set aside. Start-up costs refer to any amount paid for researching or starting a business. Organizational costs include expenses incurred to form a corporation, partnership, or limited liability company (LLC).
Insurance premiums
Some insurance premiums are deductible for small businesses. Insurance premiums for damage caused by fire, theft, or accident are deductible. Liability, negligence, industrial accident, unemployment, business interruption, and automobile insurance are generally deductible, subject to certain criteria. Please note that auto insurance is only deductible if the car is used for business purposes.
Health and long-term care insurance paid by a partnership to its partners are generally deductible as a guaranteed payment. An S company's health or long-term care insurance to employee shareholders who hold a stake of 2% or more in the company is also deductible. However, it must be included in the salaries of shareholders who are subject to federal income tax.
Vehicle-Related Expenses
As in the previous section on auto insurance, other expenses related to motor vehicles are only deductible to the extent that the vehicle is used for business purposes. Keep detailed records of your business trips to verify your deduction if your vehicle is used for business or pleasure.
To deduct the mileage driven for work, you can select the standard mileage rate or the actual expense method. The default mileage rate, set annually, is simply multiplied by the miles of the business you run. Alternatively, you can also keep a record of all expenses related to the car, including depreciation, registration, auto insurance, repairs, and gasoline. The percentage of commercial use of your vehicle applies to the actual expenses to reach your deduction. For example, if you had $1,000 in car expenses and drove the business vehicle 50% of the time, your deduction would be $500.
Phone and Internet charges
You can deduct phone and Internet expenses whether or not you claim the home office deduction, as long as the expenses are directly related to the business. For example, it is not possible to lower the first line of your home phone. However, if you have a second line dedicated to business, you can deduct the additional cost associated with the second line.
Advertising costs
Reasonable costs incurred in promoting your business are tax-deductible. Lobbying expenses are generally not tax-deductible.
Travel expenses
This may be tax deductible if they are routine and necessary for your business. Travel should get you out of your normal work area, take much longer than a normal workday, and you may need to rest or sleep to perform the demands of your job outside the home. To verify your deduction, keep detailed records of your business travel expenses, including transportation, accommodation, and non-entertainment meals.
Study costs
You can deduct training costs necessary to maintain or improve your professional skills. It should be related to your current activity rather than a new profession or business.
Retirement plan contributions
Contributions to SEP, SIMPLE, or eligible pension plans may be tax-deductible. You can deduct contributions made to the plan for your employees. If you are a business owner, you can also deduct contributions made to the plan on your behalf.
Self-employment taxes
Self-employment taxes, which Social Security and Medicare fund, are paid by independent contractors and small business owners. The total tax rate for your own account is 15.3%. Because you are both the employer and employee of a small business, 7.65% is essentially the employer's share, and 7.65% is the employee's share. When you complete your income tax return, you can deduct half of your employer's personal income tax.
This is an overview of ten common deductions for small businesses. There are many other deductions for small businesses. The main conclusion is that any business expenses you deduct should be reasonable and directly related to your business. Want to know others? Consult a tax professional such as ROSOVICH & ASSOCIATES, INC.
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