As a small business owner, tax season can be a stressful time. With all of those forms to mail to employees, expenses to track, and checks to write to the IRS, no-one could blame you for dreading the month of April. But beneath the bureaucratic onslaught, there is one shining beacon of hope: deductions, deductions, deductions. For the small business owner, deductions are a world of plenty.
Like everything to do with the IRS, the rules around deductions can be nuanced, so it’s important to do your research, talk with an accountant, and use a good tax calendar to stay on track of regulations and deadlines. Advises Austin-based Certified Public Accountant, David Coffman, “Make sure to keep good detailed records supporting your deductions for at least 6 years, and fill out the proper forms correctly and completely.”
Here are just a few deductions you won’t want to miss:
1. Travel Expenses
Rest assured that when you stay overnight at a hotel while conducting business away from home, that night will be fully tax-deductible. In fact, every night you spend away for business purposes will also be deductible, as will 50% of any meals you eat out (with or without a client in tow), any rental cars and plane tickets, and sometimes even transcription or translation services while traveling abroad.
Thinking of extending your stay for a little vacation time? As long as the purpose of your trip is mainly for business, you can still deduct your travel costs to and from the destination. “However,” Coffman cautions, “expenses specific to the personal portion are not deductible.”
No matter what, just make sure to keep good track of your receipts regardless of the total (yes, even if it’s below $75).
2. Auto Expenses
Do you use your car for business? Do you own a company car? Some of the costs associated with gassing up and maintaining that car will be deductible. For 2012, you’ll be able to deduct 55.5 cents per each mile driven, as well as all business-related tolls and parking fees. Don’t just eyeball this, especially if you only own one car—it’s a red flag for IRS eyes. Keep track of the exact miles you drive, enter them into your accounting system or hand them to your bookkeeper, and include a detailed description for each recording.
3. Current and Capitalized Expenses
It’s easy to confuse current and capital expenses, so it’s worth defining them separately. Current expenses are things like rent and electricity bills—those ongoing costs that keep both your office and your business up and running. Capitalized expenses, on the other hand, are expenditures like equipment and vehicles. Current expenses are simply deducted from your business’ yearly gross income, while capitalized expenses must be deducted over a number of years. A general rule of thumb is this: if an item has a shelf life of longer than one year, it’s capitalized. That being said, many items such as office supplies and repairs can be deducted as current business expenses, but only after your business has opened its doors. Before that, they’ll be capitalized. Confusing? Maybe, but understanding these distinctions and filing accordingly will be well worth the effort in the end.
4. Software and Subscriptions
Once upon a time, businesses looking for deductions in the area of software and subscriptions had to depreciate the cost of computer software over three years; see current vs. capitalized expenses. Now, however, computer and software expenses can be cited as expenses up front using the Section 179 election, just like magazine subscriptions.
5. Health Care Costs
Though exact amounts and procedures will differ based on the type of business filing you have, many health care costs are deductible for small business owners. For proprietorships, health insurance premiums are 100 percent deductible on Form 1040 as an adjustment to income, though that deduction can’t be more than your business’ net profit, and the deduction is void if you’re eligible for any other kind of health coverage—including those of your employed spouse. However, if your spouse worked for your business, then his or her premiums are also fully deductible.
Things will be a little different if you’re filed as a C-Corporation. In this case: “Health care costs, including out of pocket expenses, are deductible as a business expense under a health reimbursement arrangement,” says Coffman. You’ll want to contact accountant to get this set up at least in your initial year as a C-Corporation.
6. Bad Debts
It’s never any fun when a client doesn’t pay or a vendor doesn’t deliver, but if you’ve got a bad debt on your rolls, it may be deductible, but only for accrual basis rather than cash basis taxpayers (learn the difference here). Says Coffman, “If an accrual basis taxpayer has billed for his goods and services, he may write off as a bad debt any amounts not collected. A cash basis taxpayer may not write off uncollected fees for services or goods, but may write off the cost of the goods that were not paid for.”
Unfortunately, this applies only to goods, not to services, which are a lot more difficult to quantify. Alas, you truly cannot recover lost time.
7. Home Office Deductions
Home office deductions are popular among small business people. If you work from home, you can deduct for depreciation, utilities, insurance premiums, mortgage interest and repairs. However, the deduction counts only for that space, and you must use the area regularly and exclusively for business. If you think this is a good excuse to get a break for all of that yard landscaping you’ve been paying for, think again: the rules around this deduction are strict, and it is often a trigger for audits, so learn them well before filing incorrectly.
8. Business and Professional Fees
If you’ve bought business books, paid any fees to lawyers, tax professionals and more, and their service is clearly related to this year’s activities, these all qualify as deductions. However, if these fees relate to future years, they’ll need to be deducted over the life of the benefit they provide.
9. Retirement Contributions
If you’re self-employed and contribute to a SEP-IRA or Keogh, these can all be deducted on your personal income tax return.
Adds Coffman, “This is one of the few areas where you can claim a deduction in the current year for amounts paid in a later year. You get to see the effect of the deduction before you actually commit to it. Some plans, however, must at least be established prior to the end of the year.”
10. Phone Calls
Business-related phone calls are fully deductible, even if you conduct them on your personal cell phone or home phone. As with mileage, you just have to keep good records that separate the business calls from the personal ones. A good way to do this is to circle business calls and write a description on your bills, total them up and keep a copy to be added into your final returns. If you add a second line or buy a cell phone that’s dedicated primarily to business, you’ll be able to fully deduct any regular fees and charges associated with the line.
When tax season comes around, there’s a lot for small business owners to think about, and just as many deductions to benefit from as well. Do your research, keep abreast of the latest regulations, and contact a good accountant early in the year to get it done right. Don’t wait until the last minute, or you may miss out!