Starting a small business can be an exciting but daunting venture. There are many things to consider, from the type of service or product you offer to financing and marketing. One thing that often gets overlooked is taxes – and with them, potential deductions could help your business save money. This article will discuss five little-known tax deductions for your small business.
Many small business owners may need to be made aware of these deductions, which could reduce their overall tax liability and increase their profits. With careful research and record keeping, taking advantage of these five deductions could mean the difference between success and failure for your business.
What is a Tax Deduction?
A tax deduction is a reduction in the taxable income of an individual or business. It is essentially a way for the government to incentivize certain activities by taking less tax from those who perform them. For individuals, deductions reduce their taxable income and reduce the amount they owe in taxes at the end of the year. For businesses, deductions can be used to help offset expenses incurred while conducting business operations.
When it comes to small business taxes, there are several deductions available that can help reduce your company’s taxable income and lower its overall tax obligation. Here are five of the lesser-known deductions you should be aware of:
1: Home Office
You may be eligible for a home office deduction if you use part of your home exclusively for business. This tax deduction recognizes that some companies require the occasional use of their residence to conduct business, in addition to renting or purchasing an outside office or establishment. When claiming this deduction, you must have a dedicated space in your home used solely for business purposes as proof. You can only claim an area used for conducting business activities.
Regarding what can be deducted, rent or mortgage payments associated with the space can often be deducted, as well as utilities and other related expenses such as phone bills, internet costs, and insurance payments. Furthermore, maintenance and repairs related to the space are also eligible deductions under Business Use of Your Home. These deductions are available on federal and state taxes when filed correctly with proper documentation, including invoices, receipts, and statements from vendors who provided goods/services related to the space’s upkeep.
The IRS defines a “home office” as used regularly and exclusively for conducting business-related activities. It does not need to be a separate room but rather just an area in the home where no other activities occur except those concerning the business. The amount of deduction taken usually corresponds with how the business is utilizing much square footage within the dwelling – although other factors such as time spent working in the area can also influence this amount, so it’s important to keep detailed records of all work done within that space over a specific timeframe if applicable (i.e., number of hours worked).
It should also be noted that special rules apply if you intend to sell your home; any portion claimed on deductions will reduce your capital gain tax exclusion amount (the amount up to which profits on any qualified sale can be excluded from taxation). To maximize the benefits of these deductions and credits, consulting with an accountant or tax specialist specializing in small businesses before filing taxes each year is the best practice.
2: Depreciation
Depreciation is a significant tax deduction for small business owners, as it allows them to reduce their taxable income by reducing the cost of items they purchase or use in their operations. Depreciation deductions can be taken for assets such as property and equipment purchases, vehicles purchased for business use, and furniture used in the office.
The IRS has several different methods available when it comes to calculating depreciation. The most common type is the straight-line method, which assumes the asset will lose value consistently over time. This means you will get an equal amount of depreciation each year until the item reaches its original cost value. Other options include:
- Accelerated depreciation allows you to take a larger deduction in the early years of owning an asset.
- Bonus depreciation will enable you to take an extra deduction on top of regular depreciation.
- Tax-exempt leasing allows companies to lease equipment without paying taxes on it.
When taking advantage of this tax deduction, it’s vital to ensure you understand all the associated rules and regulations. You should also be aware that some assets are not eligible for this deduction and need to be reviewed on a case-by-case basis. Additionally, specific limitations may be placed on your ability to claim this deduction based on your particular situation.
Understanding how depreciation works can help you save money on taxes and ensure your business takes full advantage of all available deductions. While some research may be required to determine what type of deprecation best fits your needs, taking advantage of this tax break can save you thousands in yearly taxes.
3: Health Insurance
If you are a small business owner, you can deduct the cost of your health insurance premiums from your taxes. The deduction is only available for specific health insurance plans and only if the premiums are considered “ordinary and necessary” business expenses.
If you are self-employed, you can deduct the cost of your health insurance premiums on your income tax return. If your business offers a health insurance plan to its employees, you may be able to deduct the cost of premiums paid for by the company. Employees covered under the plan may also take advantage of this tax deduction.
To qualify for the deduction, the health insurance must be purchased for yourself, your spouse, or your dependents. The coverage must also be considered an “essential health benefit” under the Affordable Care Act. This includes coverage for doctor’s visits, hospitalizations, prescription drugs, and more.
4: Start Up Expenses
Start-up expenses are deductible for any small business that has launched during the current tax year. The Internal Revenue Service (IRS) outlines specific categories of costs eligible for tax deductions, such as fees related to launching a website or advertising campaigns. Generally, the IRS allows businesses to deduct up to $5,000 in start-up costs over all years combined since the business was first launched.
These start-up expenses may include costs like those associated with investigating and creating a new business, such as researching potential markets, customer demographics, and other factors necessary for creating a business plan. Additional costs, including hiring consultants or attorneys to help set up the legal structure of your business, are also eligible for deduction. Additionally, expenses incurred in setting up a place of business, such as rent deposits and utility installation fees, can also be deducted.
However, start-up costs that cannot be deducted include the following:
- Any amount spent on land or buildings.
- Amounts paid in connection with an acquisition of another company.
- Amounts paid before an active trade or business.
- Research and experimentation.
- Organizational costs related to establishing a corporation.
- Employee payroll.
It’s essential to remember that even if these expenses are not deductible under the $5,000 rule, they can still be amortized over 15 years or depreciated using MACRS depreciation methods, depending on the type of asset purchased.
Small businesses must keep track of their start-up costs to properly calculate their deductions when filing taxes. Business owners should create detailed records documenting all relevant start-up expenses and ensure that all documents are dated accurately to verify when each expense was incurred. By properly taking advantage of these deductions you can save yourself hundreds or thousands of dollars at tax time!
5: Charitable Contributions
Charitable Contributions made by small businesses are tax deductible, provided the donation meets certain criteria established by the Internal Revenue Service (IRS). Donations must be made to a qualified 501(c)(3) charity for them to qualify for a deduction. These donations can either be monetized or non-monetized and include donated goods regarded as inventory items.
Monetary donations may include checks, credit card payments, money orders, or cash given directly to the charity. Non-monetized donations may consist of clothing and furniture that are given directly to a qualified 501(c)(3) charity. When giving these items away as a donation, they must be valued at their fair market value when they are donated. The value of donated items cannot exceed 50 percent of what is known as the taxpayer’s adjusted gross income (AGI) for the year.
In addition, when donating tangible property such as equipment or furniture, it must have been used primarily for business purposes prior to being donated in order for it to qualify for deduction purposes. Any capital gains from donations of appreciated assets like stocks or mutual funds must also meet IRS guidelines in order for them to be deductible.
Finally, any charitable contributions received by a small business owner should be documented properly with supporting documents such as receipts from the charity showing how much was donated and when it was done so that it can easily be tracked and verified if needed. This helps businesses comply with IRS regulations regarding charitable donations and other deductions taken on their taxes.
Need Expert Tax Help?
Tax season can be an extremely stressful and challenging time for small business owners. It is important not to overlook any deductions that could potentially help your business save money on taxes. Many people are unaware of the tax deductions available, but knowing what deductions you are eligible for can save a significant amount of money each year. Sunrise Virtual Assistant Services can provide invaluable help with tax preparation and bookkeeping.
The Sunrise Virtual Assistant Services team specializes in providing comprehensive accounting services such as bookkeeping, payroll processing, financial reporting, and more. Their experienced staff will provide detailed guidance on maximizing your deductions through the most efficient means possible. This includes researching every applicable deduction under the federal and local tax laws so you can get the most out of them for your business. We’ll also advise you on strategies to lower your taxable income via deductions, credits, and other strategies so that you don’t pay more than necessary in taxes.
Sunrise Virtual Assistant Services has extensive experience providing reliable assistance with bookkeeping and preparing taxes for small businesses during this critical time of year – ensuring no valuable deductions go unnoticed so business owners can keep more money in their wallet! Want to learn more? Schedule a consultation today.
