Tax season can bring on frantic times as you carefully get all the necessary paperwork filed, especially when owning a small business. Not only are there income taxes to be filed, but also plenty of credits and deductions to capitalize on, which can help your bottom line. From a home office to healthcare costs, there is a plethora of overlooked deductions to keep in mind when preparing taxes.
The home office is often overlooked as a deduction. It is also one that if not understood thoroughly, can cause issues by receiving too much tax credit. A home office is defined as a space in the home that is solely used for business purposes, and not just a room in the house that is casually used for other reasons. This is where you meet with your clients, make business deals or conduct normal and regular business activities, such as an in-home hair stylist. It could also be a separate building on the property, such as a garage or pole barn.
To get a home office deduction, add up all of the house expenses, such as rent, mortgage, insurance and maintenance, and deduct how much of the home is used towards business. If the space is 15 percent, deduct that from the total expenses. This however does not cover personal expenses, such as outdoor furniture, remodeling another space in the home and other expenses that are not business related. A primary landline is also not allowed as a deduction, unless a separate line is used for the space. It should be noted that the IRS has lax rules on cell phones. If the phone is used 40 percent for work, then deduct 40 percent, and if it is a separate business phone, deduct 100 percent of the costs. As paperwork can become too much to keep track of, an alternate method for the home office deduction is to just deduct $5 for every square foot up to a maximum of 300.
Office supplies are another deduction that is often overlooked and even disregarded as not worth the time, but those costs add up over a year, especially if the business uses a fair amount. Saving those receipts will pay off at the end of the year when it’s time to start gathering expenses. That can be anything from pencils, pens and markers, to staplers and mouse pads.
Furniture can be deducted only if it used primarily for your small business, such as chairs and sofas for waiting customers, desks and other pieces. There is a cap on furniture currently at $500,000, with two ways to deduct your furniture expenses. Businesses will have to determine which is best while considering the future. The first method is to deduct 100 percent of the cost. The other is to deduct a portion, known as depreciation, over the course of seven years. However, an IRS chart will need to be used each year as the deduction can’t be equally separated because of depreciation. Each method is reported on Form 4562. Other items in the office such as printers, computers and copy machines are also eligible for both of these methods. Those units though are calculated up to five years versus seven for furniture.
Magazine subscriptions used for customers to browse or for getting business-related tips and tricks are covered under Section 179. These must be related to the business in order to qualify for the year it was purchased. For example, a landscaper or landscaping business may subscribe to any publication that gives ideas of design and improvement, and deduct it from his or her taxes.
Advertising costs associated with a small business isn’t just the blunt placement of ads like Yellow Pages or on the back or local restaurant placemats, but it includes items such as business cards, ad placements through digital platforms such as Google or Facebook, and anything else that can help the business grow. Creating logos and other graphics, within reason, can also be added into advertising costs. All costs including maintenance for a website is covered as well, in this category.
When self-employed or starting a small business, the self-employment tax is higher than what would be taken out of a regular employee paycheck (Federal Insurance Contributions Act). For small businesses and the self-employed, there is a Self-Employment Contributions Act that is similar to FICA. The downside is that the business or self-employed person has to pay both the employee portion and employer portion of the payroll taxes, currently at 6.2 percent for Social Security and 1.45 percent for Medicare. In all, that expense would total to 15.3 percent. On the Form 1040 however, half of that can be deducted on line 27 as an adjusted income, and the payroll tax would amount to 7.65 percent instead.
This article was written by Chase Hunt for CBS Small Business Pulse