What would you say if I told you that you may be missing out on hundreds, maybe even thousands of dollars by not claiming for some legitimate expenses? Many small businesses overpay on their taxes, simply because they overlook the various available deductions.
In life and business, we’re always spending money. That’s why the Adjusted Gross Income line (AGI) was developed, and why you as a small business owner, should think above this line. Your AGI appears at the bottom right-hand corner of page one of your tax return.
Thinking above the AGI means that you should always consider all your personal expenses that may have a business purpose. You may well be able to convert some of those personal expenses to business expenses, provided you can show a legitimate business purpose for the expense.
When you put your thinking cap on, you will find numerous ways in which items can be deducted as a legitimate business expense. Use the list below as a guide when you prepare your taxes for the April 15 IRS tax filing deadline.
1. Make the Most of Tax Breaks for Startups
Getting a new business off the ground takes a pretty penny, and few new business owners often don’t realize that those expenses can be deducted. Also, they often don’t keep a track of those costs before the business formally starts operations.
During the first year of your business, you can deduct up to $5,000, and the rest may be amortized over fifteen years, provided that you have adequate records. Some of the expenses claimed for your startup can include:
- A computer previously bought for home use, which is now used in the home office.
- Lunch with a future client.
- A continuing education course.
- Licences.
- Legal fees.
- Moving expenses.
- Office supplies.
- Storage fees.
Keep receipts, because credit card charges don’t show exactly what was bought.
2. Carefully Calculate Your Home Office Expenses
2014 saw the inauguration season in which the IRS allowed a simplified home office deduction. However, they only offered $5 deduction per square foot, up to a limit of $1,500 for a three-hundred square feet home office.
However, you may be able to benefit more by going the traditional route, which involves applying a percentage to a variety of other home-related expenses. Do this by measuring the square footage of your home office, and dividing it by the total square footage of your home. The result is the amount that you will apply to your utility bills, home depreciation, and mortgage interest.
Ideally, you should calculate it both ways and decide which one offers the best savings. However, if you opt for the home depreciation method and decide to sell the home at a profit in years to come, you may end up paying a depreciation recapture.
In order to take advantage of this deduction, the office has to be a dedicated area of the home, which is used for the specific purpose of conducting business.
3. Crunch Your Car Expenses Carefully
The IRS offers a standard mileage rate whereby you can calculate your business-related car costs on a per-mile basis. However, going the long route can actually offer better results.
Some people save a lot of money by dividing their business-related miles by the total miles driven, and then applying that percentage to all their other vehicle-related expenses, including:
- New Tires
- Car Washes
- Satellite Radio Fees
- Insurance
- Parking and Tolls
- Maintenance
Just as your calendar and day planner are valuable in claiming meal and entertainment expenses, so does it apply to the tax record for your car-related claims.
If you work from home but don’t claim for your home office, you have a major disadvantage where mileage is concerned, since every trip out of the house is a commute. Trips to and from work don’t qualify as business-related mileage.
4. Remember to Claim Employee Expenses
Do you have employees? Do you reimburse their work-related expenses? Well, you could claim for that, providing your business has an “accountable plan” that shows that the expenses were, in fact, business-related. The expenses must be substantiated within 60 days, and any excess advancements must be refunded within 120 days. Keep all your backup documentation in the form of receipts, in case the IRS requests them.
Work-related employee expenses that can be claimed, include:
- Transportation
- Gas
- Meals
- Hotel Accommodation
- Gratuities
- Baggage Fee
- Payroll Taxes (social security and medicare)
- Unemployment Taxes
- Pension Plans
Of course, you can also claim employee’s pay whether they are in-house or freelancers.
5. Don’t Forget Your Online Business Tools
When putting together your tax records, don’t forget to include online services and software your business needs to grow.
These are some of the items to include:
- Telephone
- Software
- Web Hosting and Services
- Web Design
- Research and Development
- Prizes for Contests
- Publicity
There you have it! The top 5 areas in which you can make the most of tax breaks for your small business. Did we leave anything out? We’d love to hear from you!