Top 10 Tax Deductions for Small Businesses
In the best of times, maximizing deductions is nothing less than intelligent tax planning. But in today's highly challenging economic environment, taking full advantage of using payroll software features to legitimately claimable tax deductions will not only put more money into your pocket but — in some cases — mark the difference between business success and failure.
When calculating your company's expenses this tax season, don't overlook these top 10 business deductions.
Hitting the road (or air) to either perform or find work is tax deductible, as long as the business is the journey's primary reason. Deductible expenses include plane fares, car costs, meals, tips, communications, and other items. Friends and family members may accompany you on the trip, but you can't claim any deductions for them. And don't confuse travel expenses with vehicle expenses (see below).
2. Vehicle Expenses
If your company uses a car or truck to make deliveries, visit clients, or for any other business purpose, you'll want to deduct some of the costs of keeping it on the road and moving. There are two ways to deduct vehicle expenses: the actual expense method and the standard mileage method. The true expense method generally offers the most significant deduction for newer vehicles. Still, regardless of the vehicle's age or type, you'll want to calculate expenses both ways to determine which approach offers the most significant tax break.
3. New Equipment
Few businesses can survive without new equipment. Capitalizing these costs over several years is both complex and confusing. Still, Section 179 of the Internal Revenue Code lets you deduct up to $250,000 of the cost of new equipment placed into service during the tax year. There are some limitations to Section 179 deductions, so check with your tax professional for details.
4. Bad Debt
As the economy sours, more businesses face a rising pile of bad debt. Some comfort can be found because the cost of goods sold but not paid for can be deducted. On the other hand, service providers are out of luck — deductions aren't allowed for clients who fail to pay for a time-based service.
Interest rates may be at or near rock bottom, but that doesn't mean you can't deduct the cost of borrowing money. Finance costs and carrying charges for business purchases are fully deductible. Interest is also deductible for personal loans that finance business operations.
Taxes consume a substantial portion of business revenue in good times or bad, so it's essential to keep careful records and deduct allowable taxes. Deduction rules and procedures differ for various taxes, so check with your tax professional for details.
7. Education Expenses
Many businesses and professions require owners to receive periodic training. Education expenses may be deducted if they directly relate to a current business, occupation, or trade. Education costs can't be deducted if the training prepares you for a new business or career.
8. Advertising and Promotion
Advertising and promotion can help businesses find new customers and clients in tough times. Advertising costs are fully deductible. So are promotional prices, as long as there's a clear connection between your business and the sponsorship or other activity.
9. Legal and Professional Fees
Every business needs outside advice on legal, financial, training, and various other issues. You can generally deduct fees for any legal or professional service during the tax year. However, any advice on future years must be deducted over the project's lifespan.
10. Business Entertainment
As anyone who has ever had to pitch a product or service to a client at an event knows, business entertainment isn't always the perk that many people imagine. You can deduct up to 50% of entertainment expenses if the event is directly related to your business (such as a catered meal) and business issues are discussed at the event. You can also deduct 50% of the entertainment cost immediately before or after a business discussion. In either case, be sure to keep detailed records.
Now is not the time to ignore money-saving strategies such as tax deductions. Make sure your company audits and records the money spent on the above-listed strategy, and you'll be sure to enjoy several deductions come tax season.
Learn more about small business taxes and deductions and compare the best business accounting software for small businesses.