Strategic Tax Deductions for Small Business Owners
Every penny counts when you’re running a small business; your tax liability is no different. Tax deductions can lower your bill by hundreds or even thousands of dollars, if you can properly account for the relevant expenses. Not sure what’s admissible? Take a look at five of the most valuable deductions small business owners can cash in on.
1. Vehicle expenses
If you use your personal automobile for business purposes, you can recover some of the money you spend on gas and vehicle maintenance. This tax deduction can be executed in two ways.
- Actual expense method - the deductible costs are calculated based on actual spend on gas, oil, repairs, tires and insurance. Business owners opting for this method can also deduct depreciation expenses on the vehicle in question.
- Standard mileage rate - in this instance, business owners can deduct a fixed amount for each mile driven. Parking fees and tolls are also tax deductible. For the 2015 tax year, the standard rate is 57.5 cents per business mile driven.
2. Start-up expenses
Getting a new business up and running can put a serious pinch in your wallet. From buying supplies and equipment to leasing office space and funding advertising campaigns, the costs add up fairly quickly. Fortunately, you can write off some of the expense of launching your business as tax deductions. As of 2015, the IRS permits a deduction of $5,000 in start-up costs and $5,000 in organizational costs incurred during the first year of operations.
3. Home office
It has never been easier to deduct the cost of maintaining a home office. Previously, business owners had to tally all their expenses, determine the actual percentage of the home used for business purposes, and then multiply the two to determine the tax deduction.
Now, there’s a simpler option - multiply the square footage of your home office (up to a maximum of 300 sq. ft.) by $5. Business owners taking advantage of this tax deduction have to remember to comply with the regular and exclusive use test; the home office area must be used solely for business purposes.
4. Business travel
Airfare, hotel stays, car rentals and meals all fall under the umbrella of tax deductible travel expenses. The expenses must be “ordinary and necessary” for doing business and should have been incurred away from home. Tax deductions vary based on the type of expense. While hotels, parking and airfare are 100% tax deductible, only 50% of meal costs can be written off.
You’ll need to maintain good records if you plan on claiming this tax deduction. Your records should show when and where the expense was incurred, the amount and what it was for. Make sure you hang on to copies of your receipts, bank statements and credit card statements, in case the IRS comes calling for an audit.
5. Health care premiums
Health insurance is now mandatory, and business owners can incur a tax penalty for going without it. If you have an individual health insurance plan, the cost of premiums for yourself, your spouse and your dependents are tax deductible. The policy can be in your name or the name of your business, regardless of the ownership structure of the business. Keep in mind that the tax deduction also extends to premiums paid out of pocket for dental and long-term care.
Personal expenses are NOT tax deductible
As a general rule, you cannot deduct any personal expenses incurred in the course of doing business. For example, if you take your spouse with you on a business trip, you cannot write off his or her portion of the travel expenses.
Expenses that are not reasonable or necessary for doing business are also not deductible. If it’s unclear to you whether or not an expense qualifies for deduction, check in with your accountant or another tax professional. You do not want to run afoul of the IRS.
More from the Resource Center:
- Small Business Financing Explained
- The Small Business Owner’s Guide to Tax Season
- 31 Ways to Reduce Business Costs
Bond Street does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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