Running a small business can cost a lot of money – supplies, a storefront, equipment, transportation and other expenses represent a substantial investment on your part. The government recognizes this, and allows small businesses to recoup some of these expenses by allowing them to claim certain tax deductions as a result of these expenses.
The tax deductions offered to small businesses typically fall into two categories:
Business expenses are the costs of conducting your business. Travel expenses, storefront rental, etc. are typical tax-deductible business expenses. Business owners must be able to prove to the IRS that the expenses they are deducting are ordinary and necessary, meaning that they’re commonly taken by business owners in your field and necessary to the conduct of your business.
Depreciation, amortization or depletion of capital expenses are another form of tax deductions available to businesses. Capital expenses are costs incurred by buying property or equipment that you’ll use for more than a year and will help increase the quantity and quality of the goods and services that your business sells to the public. They are not tax deductible like business expenses, but deductions can be earned through depreciation, amortization or depletion.
For example, if you’re the proprietor of a construction company and you buy a bulldozer, this is a capital expense and is not tax deductible. However, you can deduct part of your cost each year and recover some of your capital expenses throughout a multi-year time frame.
Determining the difference between business expenses and capital expenses can be tough. The IRS offers a number of no-cost tax training opportunities for small business owners and an accountant can provide you with professional advice.
The following are a few popular tax deductions used by small businesses to lower their tax burden:
Home office deduction – If your home is your place of business, you may be able to deduct a portion of your rent or mortgage, insurance, repair bills and utility costs from your taxes. To qualify for this deduction, you must have an area of your home dedicated to the exclusive use of your business and your home must also be your primary place of business.
Vehicle expense – This is another popular tax deduction for small businesses. If you use a car exclusively for your business, you can deduct most expenses involving the vehicle. If it’s a mixed personal/business use vehicle, you’ll have to determine your business-related expenses based on actual mileage. The IRS website can help you figure out how to do this.
Travel – If you travel in the course of your business, you can deduct just about every cost of your travels, including lodging, airline tickets, laundry costs, etc. You can also deduct gifts to customers or vendors, such as taking a potential client out to eat or to an athletic event. The exception is meals, which you can only deduct half of the cost. These deductions apply only to business trips. If you take a mixed business/vacation, you can only deduct the business-related costs of the trip.
Depreciation – You can deduct capital expenses through depreciation, deducting a portion of their cost over their service life. In some cases you may be able to use a Section 179 deduction to deduct the full cost in a single year, but you forgo being able to depreciate the capital expense any further in succeeding years.
Depreciable property must be property you own that is used in your business and have a useful life of more than a year. It must also not be property that you use and dispose of within a year.
Losses – If your business posts a net operating loss for the year, you can deduct the loss from your other income to lower your overall tax burden, up to certain limits. You can even spread out the loss over several tax years, reaping the maximum tax benefit from your net loss.
These are some of the most commonly used tax write-offs by small businesses. A qualified accountant or financial advisor can help find even more. Research of tax law on your own part may also yield a thus-undiscovered tax advantage you can use to your advantage in decreasing your overall tax burden.