For small business owners, there are a variety of state and federal tax exemptions and deductions that you can take advantage of to lower your yearly tax bill. Also, your business tax exemptions and can be leveraged into some nice personal perks such as business trip/vacations.
Because small business is a major engine for job creation, creating two out of every three net jobs over the past 15 years, according to the SBA, it’s little wonder that the government provides substantial tax breaks for entrepreneurs. However, because of the complex and convoluted nature of the U.S. tax code, many small business owners may not be aware of the tax benefits they may be eligible to receive.
The following is a list of some of the most widely available tax credits to small business owners:
New equipment – Purchasing new equipment can create a big tax deduction for your business. Businesses can deduct up to $500,000 in new equipment purchases from their tax bill. Business owners can also take advantage of big depreciation deductions in the first two years after they purchase the equipment.
Automobile expense – Personal automobiles used for business, or business-owned vehicles can provide deductions for the costs of keeping it operational and fueling it.
In general, you can deduct two types of automobile-related expenses, a standard mileage rate or actual expenses. Under the mileage system, you can deduct 51 cents per mile for every mile driven and also deduct tolls and parking costs. With the actual expense method, you can claim deprecation in value and also bills for actual business-related automobile expenses. With either system, it’s important to keep good records of mileage and expenses in case you’re audited.
Start up costs – New business owners can deduct up to $10,000 in capital costs when they start up their business. This deduction can be spread out over five years if it is advantageous to the business owner.
Legal and professional fees – Money you pay to attorneys or accountants can be deducted in the year which they occur. Business owners can also deduct the cost of certain books, such as those that can help you with certain business issues, such as accounting or law.
Interest expenses – If you take out a loan or use a credit card to help finance your business, you can deduct the interest expense from your businesses taxes. Again, it is important to keep financial records and documentation if you intend to use this tax deduction.
Business travel – Trips made for business purposes can have tax deductible expenses. When traveling on business, you can deduct plane fare, hotel accommodations, meals, laundry, communications and some other expenses from your taxes. You can only deduct your expenses or those of employees, however.
Unpaid debts – If a customer does not pay for goods you sold him or her, you can deduct the cost of the product from your taxes. You cannot deduct the cost of services to clients who do not pay their debt to your business, however.
Entertainment – Small business owners can deduct up to half the cost of entertaining business clients or contacts. Business owners should be careful to keep receipts and document who they have with them when they’re entertaining, however. Also be wary of the line between personal and business entertainment expenses, as getting a little careless of the expenses you claim could trigger an audit.
Taxes – There are a number of taxes you can deduct from you federal tax bill. Business owners can deduct sales taxes paid on supplies or equipment, real estate taxes and excise and fuel taxes. Some states allow business owners to deduct their federal tax liability from state income taxes.
Software – Business owners can deduct 100 percent of the cost of new software in the first year after it’s bought, and gradually declining amounts over five years. Because software can be a frequent cost to businesses, as programs are often updated and re-released, taking advantage of this tax break can be a big benefit for small businesses.
As you can see, there are a number of ways you can reduce your tax bill by taking advantage of tax exemptions offered by the government. Keeping accurate, organized records of all your business expenses is key to taking advantage of these deductions, however.
If you’re not confident of your ability to identify these deductions, consult with a professional accountant. They can help find the deductions you’ve earned and greatly reduce your overall tax burden. Remember that tax rules change frequently – sometimes from year to year – so check IRS news and others sources of tax information frequently to see if there are any new opportunities for your business to save tax dollars or any changes that my throw a kink into your operations.