Tax deductions can prove to be very beneficial for your small business setup. Not only do they put extra money in your pocket every year, but they also provide you various personal benefits, such as a mixed business vacation and trip, a nice car, etc. However, all these benefits can only be worth it, if you payheed to tax deductions of your small organization.
If you want to reduce your taxable profit, you must look for more and more tax deductions that your company can legally obtain. The tax code provisions for deductions can give you several advantages at a much lower cost. You just need to pay proper attention to the IRS rules, as to what all things are deductible and what not.
5 important tax deductions for your small business
Here are the top 5 tax deductions for your small business. Do not overlook these significant tax deductions, when totaling the expenses of your small organization at the year end.
1. Expenses of starting your small business
When you are running a business, you bear various expenses, such as utilities, advertising, repairs, and office supplies. These are deducted as the current business expenses. However, these expenses cannot be deducted before you go into your business or start your business. There are various other expenses that are incurred when one starts a new business. These are known as capital expenses.
Capital expenses can be deducted as $5,000 in the first year of your business. And, the remaining amount can be deducted over the following 15 years in equal amounts.
Tip: If you want to earn profits in your business as soon as you start with it, you can start with a small amount only to legitimately begin your business or you can delay the payment of a few bills till you are in business. However, if like many other businesses, you foresee that your business will suffer from losses in the first few operational years, then it is better to take the deduction over five years, in order to earn some compensatory profits.
2. Auto expenses
If your small business has its own vehicle or if you use your personal car for your business operations, you can deduct some costs of keeping your vehicle on the road. Car or auto expense deductions can be quite tricky to master, however they can be worth it. You can claim your business car expenses through two mediums, that is, through the standard mileage rate system and the actual expenses method.
In the standard mileage rate system, you can deduct some amount for each mile driven, that is, the standard mileage rate. In addition, you can also deduct all the business-related parking fees and tolls. The standard mileage rate varies from year to year. For instance, in 2014 it was 56 cents per business mile driven and in 2015 it was 57.5 cents per mile. On the other hand, through the actual expense method, you can record and deduct all the actual business-related expenses of your small organization.
For the standard mileage rate, you must be eligible first. The eligibility criterion asks you to use your car for the first year or your business activities. However, the standard mileage rate cannot be claimed if you have already taken accelerated depreciation deductions in the previous years or claimed a Section 179 deduction for your vehicle. Alternatively, the actual expense method offers a higher deduction at tax time, if you use a new vehicle especially for your business-related operations. It also allows you to deduct depreciation on your car.
3. Legal, books, and professional fees
You can deduct the fees that you pay to tax professionals, consultants, or lawyers in the incurred year. But, if their services are for the future years, then they are deducted as per the benefits the lawyer or other professional consultant provides to you over your lifetime.
The cost of business books, along with legal books, that assist you to perform your business without the services of tax and legal professionals, are completely deductible as business expenses.
4. Business entertainment
You can deduct 50 per cent of the business costs, if you sponsor for some prospective customers or business entertainment purposes. This can be done if the expenses are directly related to your small organization and you have a business discussion at the event. For instance, a catered meeting associated with your business or that takes place at your office, in which the business entertainment happens just before or after the business discussion.
Tip: Make notes for every business entertainment bill or receipt that you pay. Also, include the specific business purpose on the note, such as “Lunch with Harry Slater of Bond Manufacturing Corporation to discuss the widget contract.”
5. Bad debts
In case you are deceived by someone in your business, your bad debt could be or could not be deducted. Bad debt deductions depend on the type of product your firm sells. If your small business sells goods, the cost of the products that you have sold, but are not paid for, can be deducted. However, if your small business offers services, you cannot deduct any amount for the time devoted by you to a customer or client who does not pay.
Thus, you should remember to make a note of all the above-mentioned tax deductions, in order to gain profit from your business and reduce its taxes. Make sure that the deductions you claim are fair and legitimate.
Asharp Bookkeeper
