Top 7 Overlooked Tax Deductions for Small Business
Congress knows that it takes money to make money, so the Internal Revenue Code makes pretty much any expenditure that is used to produce business income deductible. The list of items that can be deducted is so long and broad that many small business owners miss out on deductions they qualify for. Here is a list of the top 7 small business deductions that are commonly overlooked.
If you have a home-based business, you may be able to deduct part of your rent or, if you own your home, take a depreciation deduction on your property. This tax break is known as the home office deduction. An apartment, house, boat, mobile home, condominium, or any other place with cooking and sleeping facilities will qualify. According to the IRS, just over two million small business owners claim the home office deduction. Undoubtedly, more people qualify for it but are either unaware or afraid they will be audited if they do.
Employees and Independent Contractors
At some point, as your business grows, you will need to hire employees and/or independent contractors to perform specific tasks. Salaries, wages, and money paid to hired hands are tax deductible. This includes regular wages, vacation pay, sick leave, bonuses, training expenses, and reimbursements.
If you are a business that sells goods, usually you have to maintain an inventory. It is important to know that only your net profit from goods sold is taxed as income. This means that you deduct what you spent for your inventory as well as general business expenses. The IRS demands that small business owners list the fair market value of their inventory.
Retirement Account Deposits
Employer-made contributions to retirement accounts are tax deductible as compensation paid to employees. These contributions must come from earned income, not investing or inheritance.
Fees Paid to Professionals
Business related fees paid to accountants, lawyers, and consultants are always deductible, however, sometimes the deduction must be spread over future years.
- Fees related to one-time business deals or sales are immediately deductible.
- Professional services that provide a benefit that goes beyond the present year, a long-term contract or example, must be deducted over the life of the expected benefit.
You can claim tax deductions for money spent on your business before it was even operational. There are three start-up tax rules and one bonus rule to choose from and each provides its own benefit.
- Rule One: Allows you to deduct up to $10,000 of your start-up costs your first year. Anything over $10,000 must be deducted over the following 15 years.
- Rule Two: You may choose to deduct your start-up costs pro rata over 15 years.
- Rule Three: You may choose not to deduct start-up costs. Instead, you may choose to recover start-up expenses after you sell or close your business.
- Bonus Rule: In addition to the start-up cost deduction, corporations, partnerships, and limited liability companies can claim an extra $10,000 deduction as long as total start-up expenses do not exceed $60,000.
Tuition, books, fees, and supplies are deductible as business expenses if they are related to your established business, occupation, or trade, and are used to maintain or develop skills that are required in your field or by law.