Money-Saving Tips & Recommendations

10 Commonly Missed Tax Deductions by Small Business Owners

10 Commonly Missed Tax Deductions by Small Business Owners

When it’s time to pay Uncle Sam, there’s no need to break open your wallet and break your bank account. There are many easy ways to save money on taxes for small business. Many of these tax deductions are easy to learn and implement.

Tax laws change constantly, so it’s smart to always have a qualified tax accountant to turn to when you have questions. Uncle Sam does provide some nice loopholes, but using them wrong can potentially cause a great deal of grief for you and your business.

1. Write-off Your “Going Into Business” Expenses

As you know, starting a business can be very costly. Registering your business with local, state, and federal agencies, finding space to lease or purchase, buying all those office supplies, advertising for employees, hiring an advertising company, and so on. Quite a few of these pre-opening expenses are considered “capital expenses” and are deductible (up to $5000) during your first year of business. If your expenses exceed the $5000 amount (say, $10,000), then you have to deduct the balance evenly over the next 15 years. Although $5000 may not seem like much up front, when added into the tax balance at the end of the year it can be a very welcomed deduction.

2. Entertaining for Business Purposes – Talk Business, Take Notes, and Archive Those Notes.

Taking clients, vendors, and associates out to eat or play a round of golf is a fairly normal and accepted business practice. Not knowing how to write off these expenses for tax purposes is one of the greatest issues encountered by the IRS. The guidelines are simple, but it’s up to you to treat your entertainment like business.

The standard deduction for business entertainment is 50% of the total cost — under these circumstances:

– The expense has a direct relation to (your) business (feed your employees in office during a meeting); or

– The entertainment involves people who directly affect your business and the entertainment happens right before or after the intended business.

Don’t rely on your memory to track this record. Take notes on receipts, shoot yourself an email or somehow have the event recorded as an official record that you can access when filing your tax returns and have on hand in the event of an in-house audit.

3. Deduct the Cost of Software Up to 100%

What business does not include some type of software expense these days? From email to creating spreadsheets, software supports our business and makes us more efficient and profitable.

Therefore, until 2011, you can deduct up to 100% of your software expense under Section 179 of the IRS Code which states software bought and placed into service between January 1st, 2003 to December 31st, 2010 can be fully deducted in the year it was placed in service.

Starting in 2011 you can no longer use Section 179 to deduct off-the-shelf software.

If your software comes bundled with your computer and not treated as a different expense, it is considered part of the hardware and you have to depreciate the cost over 5 years. However under Section 179 you can write off the entire expense of the computer in the first year it was placed in service. ($133,000 maximum in 2010).

IRS Publication 946, How to Depreciate Property, will give you more complete details.

4. Education for Better Business

If you take community classes, go back to college, go to a seminar, or read a book that improves your skills in your current business, then the expense of that education is tax deductible. This is a good rationale for employees to improve their skills and make your business more productive and profitable.

If you are currently going to school for the sake of landing a new job or to find your calling in life, then that is not deductible as a business expense.

5. Phone Expenses for Your Home Business are 100% Deductible

If you operate out of your home and you, like most homes, have just one phone line, you may deduct 100% of the expense of your business related calls from your bill.

At the end of the month when your bill comes in, grab it, locate the business related calls you’ve made that month, circle them, total them, and keep a record of that total on the bill.

At the end of the year pull out your phone bills for the year, total up your business call expenses, and deduct the entire expense – 100% of the costs.

If your phone is a shared home/business phone then the standard phone fees and charges cannot be deducted. If you have a second line installed and that line is used solely for business purposes then the entire amount of the bill is deductible.

6. Hire Your Kids and Keep It in the Family

If you run a sole proprietorship or partnership where your partner is your spouse, you can hire your kids and write off their wages as a business expense. Your child must be 17 or younger and a benefit for them is there is no Social Security taken from their pay.

If you have a large family this can save you a lot of money in the operation of your business. If you operate as an LLC or a corporation this tax deduction is not available to you.

7. Drive a Lot, Save a Lot

There’s almost no avoiding it. At some point you’re going to drive somewhere for business purposes. Luckily you can deduct all of that mileage from your taxes at a pretty good rate for 2010.

Important Note: Keep A Logbook! This is one of the most abused tax laws and the IRS is cracking down. Keeping good notes will help you avoid an unexpected tax issue and will keep you on the road.

Log all of your actual miles driven. If your place of business is at your home, you may start deducting mileage from the moment you leave your driveway until the time you return. If you drive from an office, your deductions start at your first business destination and end at your last.

Also, log expenses such as tolls, and parking costs, multiply your mileage by .50 per mile at the end of the year, add in your other expenses, and deduct the total from your tax bill.

You may also deduct the cost of a lease, or the interest of a car loan.

8. Deduct Your Home Office – Regardless of Its Size

Deducting the home office can be a slippery slope because the burden of proof is on you as to whether or not your office and related equipment is used for business purposes only. However if you keep your computer(s) separated from the family and use only a portion of a room, you’re in luck.

You can deduct the percentage of the home you use for business activity including space, rent, and utilities. How? Say your “office” is in your bedroom, at a desk in the corner. Measure off the amount of space you use in that room for business purposes, divide it by the square footage of the home, and use that percentage as the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

9. Miscellaneous Equipment

Items such as computers, copiers, fax machines, and scanners also are tax deductible. As with furniture, you can take 100% up front or depreciate it over five years.

10. Retirement Accounts

Are you self-employed and saving for your own retirement with a SEP-IRA or Keogh? Don’t forget to deduct your contribution on your personal income tax return. Employer contributions are not part of your personal tax deduction.

These are ten commonly overlooked deductions by business owners. There are many more and hopefully we will be able to share more of those business deductions with you over time. We hope that you will be able to use these tips effectively for your business. As we mentioned at the beginning of this article, it’s a wise choice to consult the expertise of a CPA or tax professional who can validate that these deductions are appropriate for your type of business.

This post was last updated on July 19, 2023.

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