It’s quite simple; the more tax deductions your business can legally take, the less tax you will have to pay. That’s because the amount of your profit will be lower. In addition to avoiding large tax bills at the end of the year, some of the available tax code provisions will also improve your quality of life. For example, you could have a nicer car to drive at a very small cost, or the ability to combine a business trip with a vacation. But like anything tax-related, you will need to pay close attention to the IRS rule about what is – and what is not – tax deductible.
According to Nolo.com, the online legal encyclopedia, there are certain tax deductions that small business owners should not overlook.
1. Auto Expenses
Mastering the rules of car expense deductions can be tricky, but well worth your time. If you’re using your own car for business, or your business owns a vehicle, you can deduct some of the costs of keeping it on the road. There are two methods of claiming expenses, the Actual Expense Method and the Standard Mileage Rate Method. Most people use the standard mileage rate because it provides a larger deduction by giving taxpayers a certain deduction for each mile driven. For 2013, this is 56.5 cents per business mile.
2. Expenses of Starting a Business
Once you’re running your own business, expenses like utilities, advertising, office supplies, and repairs can be deducted as current business expenses. Keep in mind, however, that these should be done after you officially start your business; business write-offs are not retroactive. The biggest expense of starting a business started is capital, and you may deduct $5,000 of this during the first year you’re in business; with any remaining amount deducted in equal amounts over the following 15 years.
3. Books and Legal and Professional Fees
Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you get from the lawyer or other professional.
Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.
4. Bad Debts
If a client skips town and decides to stiff your business, the bad debt may or may not be deductible — it depends on the kind of product your business sells. If you sell goods, you can deduct the cost of any goods that were taken and not paid for. However, if your business provides services there is no deduction allowed for your time.
5. Business Entertaining
If you choose to entertain a present or prospective client, you may deduct 50% of the cost if it is either directly related to business, or business is discussed at the event, or associated with business by taking place either immediately before or after a business discussion.
Business travel is often one of the largest expenses a company incurs, but you can deduct many of these expenses, including transportation by car, plane, train or taxi, plus lodging, telecommunications and more. Be sure to read the IRS guidelines carefully before determining your deductible travel expenses.
Can you combine a business and a pleasure trip? It’s okay, as long as business is the primary purpose of the trip. However, if you take your family along, you can deduct only your own expenses.
7. Interest payments
If you use credit cards to finance business purchases, all interest and carrying charges are fully tax-deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
8. New Equipment
Some small businesses can write off the full cost of some assets in the year they buy them, rather than capitalizing them — deducting their cost over a number of years. According to Section 179 of the Internal Revenue Code, you can deduct up to $500,000 of the cost of equipment and certain business assets are purchased and placed into service during 2012 and 2013. The annual deduction amount is scheduled to go down to $25,000 in 2014.
9. Moving Expenses
If you move because of your business or job, you may be able to deduct certain moving costs that would otherwise be considered personal living expenses. In order to qualify, you must have moved in connection with your business or for an employer. The new workplace must be at least 50 miles farther from your old home than your old workplace was.
To learn more deductible small business expenses, look for Part Two of this article next week at BizSale.com.