Possible Tax Deductions for Small Business Owners
Today, April 18th is the dreaded “D” Day: Taxes are due. If you are a small business owner and have waited until the last minute to take care of your taxes make sure to consider the deductions listed below. If you’ve already filed, then you can always take them into account come next year’s filing season.
You have a “Home-Business”
If you run your business is ran through your home, you can acquire a huge tax deduction. There are two different ways that the IRS says you can qualify: 1) regular and exclusive use and 2) principal place of business.
“Regular and exclusive use” simply means that you use a spare bedroom or den in your home only to conduct business. For instance perhaps you run an online business through your bedroom or perhaps you’re a lawyer and file legal briefs etc. within one designated area on a regular basis (this is the key word, regular basis). This is not to be confused with simply having a “home office” where it serves as more of just a convenience. To learn more and how to differentiate the two, click here.
“Principal place of business,” on the other hand, means that while you may have other offices, the head office or headquarters is located within your home. Generally proof that administrative and bookkeeping tasks are completed within the home is needed to claim this deduction. To learn more, click here.
You Wine and Dine Your Clients
The IRS also allows small business owners to claim up to 50 percent deductions if you have proof that your meal and entertainment expenses/ transactions are business-related. This means that you have to partake in some sort of business endeavor/discussion either before the meal/event or at least after. However, you must have your receipts in order to claim this deduction (no exceptions). So if you did not save your receipts last year, start to do so now. Additional note: do not try to get deductions from un-related business meals/events. The IRS frequently audits those who claim this deduction since it is the one that is abused the most.
Business –Related Travel
If you use your personal vehicle for business-related purposes, for instance you use your car to meet up clients, customer or vendors or even to attend a local business meeting, the IRS allows you to deduct the mileage. It’s important that you keep accurate accounts and mileage records however, since this is an auditing-prone deduction as well. To learn the standard mileage rates, click here.
If you go on a “business trip”, you can also qualify for a deduction. But like all of the other deductions the trip has to directly correlate with your line of work and you must save all of your receipts in order to receive a 100 percent deductible on your business-travel expenses.
With that said, here are some additional deductibles you can consider as well: Cost of goods sold; charitable donations; and software, advertising and education expenses.
By-line:
This guest contribution was submitted by Jamie Davis, who specializes in writing about masters degree. Questions and comments can be sent to: davis.jamie17@gmail.com.
Hiring Family Members For your Business
Employing your Child – A reasonable salary paid to a child reduces the self-employment income and tax of the parents (business owners) by shifting income to the child.
If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Hospital Insurance (aka Medicare or HI) – taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. accordingly, the child will not be required to pay the employee’s share of the FICA taxes and the business won’t have to pay its half either. In addition, by paying the child, and consequently reducing the business’s net income.
A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. However, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.
- Retirement Plan Savings – Additional savings are possible if the child is paid more (or works part-time past the summer) and deposits the extra earnings into a traditional IRA. For 2010, the child can make a tax-deductible contribution of up to $5,000 to his or her own IRA. The business also may be able to provide the child with retirement plan benefits, depending on the type of plan it uses and its terms, the child’s age, and the number of hours worked. By combining the standard deduction ($5,700) and the maximum deductible IRA contribution ($5,000) for 2010, a child could earn $10,700 of wages and pay no income tax.
Hiring Your Spouse – Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee.
If the spouse was unemployed (worked less than 40 hours) during the prior 60-day period, the employer will qualify for exemption from the employer’s 6.2% share of the Social Security payroll tax on the spouse’s wages for the remainder of 2010. If the spouse continues to work for an uninterrupted period of 52 weeks, the business would also be entitled to a retention credit of up to $1,000 in 2011. (Unemployed relatives such as children, siblings or parents whom you may hire are not qualified employees for this credit.)
Originally written for another blog. Edited here by Sandi and republished for your information.
Information you need
Released – January 14, 2009
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