Tax Deduction Tips for Your Small Business

Available Tax Breaks for Small Businesses

By: Pam Grundy

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Tax breaks for small businesses are even more important than usual in today’s tough economic conditions.These taxes scare off a lot of would-be entrepreneurs, but understanding small business tax deductions and discovering new tax breaks for your home-based business doesn’t have to be an intimidating or difficult experience. Lots of good resources for understanding and maximizing small business tax deductions are available to entrepreneurs, and many of them are free of charge.
The following tips and tricks can help any entrepreneur discover and maximize tax breaks and small business tax deductions:

Hire a Good Accountant

Many entrepreneurs stew in their own juices and agonize unnecessarily about tax issues that a good accountant could solve in a short session or sometimes with a brief phone call. In today’s tough market, every small business needs a good accountant. Even the smallest home-based business can save hundreds of dollars in small business tax deductions each and every year with a good accountant on board. Having a good accountant available for questions and advice allows a small business owner to focus on the actual work of the business, instead of obsessing about issues better understood by a professional. Plus, accounting fees are tax deductible.

Auto-Use Deduction

The use of an automobile in the course of running a small business can be taken as a deduction. The auto deduction can be regarded as a mileage expense or as the actual expense associated with the vehicle, including depreciation and the cost of the car itself.
In order to use the actual expense method (the larger of the two), the vehicle must be used only for business. If the vehicle is used for both business and personal reasons, mileage for the business-use portion can be deducted at the rate of 50.5 cents per mile for January 2008 through June 30, 2008, and 58.5 cents per miles for July 1, 2008 through December 31, 2008.
To qualify for the standard mileage rate, mileage must be deducted in the very first year the car is used for business.

Start Up Expenses

Up to $5,000 of the expenses associated with starting up a home-based or small business can be deducted in the first year. This includes business equipment purchases, advertising expenses, marketing, and so forth. If these expenses exceed $5,000 in the first year, the amount over $5,000 can be deducted over the next five years. Start up expenses can’t be deducted before the business is operational. Some business has to be conducted in the year the deduction is taken.

Legal and Professional Fees

Payments to a lawyer, business consultant, or accountant, as well as the cost of any books purchased to aid a small business in operating outside of paying such fees (for instance, tax manuals) can be taken as deductions.

Education Expenses

Tuition and book fees for courses taken for the purpose of keeping current in a line of business, can be deducted. Courses and books taken to prepare for a different line of work do not qualify for this specific deduction.

Equipment Expenses The costs of replacing business equipment or buying new equipment are deductible.
Smaller business can usually deduct the full amount in the year the equipment is purchased. Some restrictions apply (equipment purchased for resale, real estate, items purchased from relatives are not eligible) and the deduction is capped at $250,000. At the high end, the deduction may have to be spread over five years.

Bad Debts

The cost of products provided to a customer who doesn’t pay can be taken as a deduction. Unfortunately, the cost of services provided that were not paid for cannot be taken as a deduction.

Business Entertaining

When entertaining takes place in the course of a business discussion, and at least some business is discussed during the entertainment session, 50% of the expense can be taken as a deduction.
The deduction can also be taken if the entertainment expenses directly follow a business meeting; for example, meeting with a client to conduct business, and then immediately taking that client to lunch qualifies the lunch as deductible at 50% of the amount spent.

Travel Expenses

Travel expenses that result from travel for business-related purposes, are tax deductible. Even if some pleasure is included in the trip, as long as the trip was primarily business-related, the expenses are deductible.

Interest

The interest charged on loans or credit cards is not tax deductible on personal tax returns (although it once was, years ago), but interest charged on small business purchases is deductible. That’s why separate business credit cards and banks accounts are advisable for home-based and small businesses.
Setting up a separate small business checking account and credit card aids in record keeping when tax time comes around.

Software

Any software purchased for business-only use is tax deductible until 2011. After that, this 100% deduction will no long be available to small businesses. Software that comes installed on a new computer is considered part of the computer and is not deductible.

Taxes

Many kinds of taxes are deductible when they are paid in the course of running a small business. Some of these taxes include: sales tax on business items, excise and fuel taxes, employment taxes, and real estate taxes paid on a place where business is conducted.

Advertising and Promotional Expenses

These kinds of expenses are all deductible, including sponsorship of softball teams (uniforms, donations, etc.) and the costs associated with sponsoring other community events for the purpose of promoting and advertising a small business.

Home Office Deduction

In order to take this deduction, a small business owner must have a separate space set aside in which only business activity occurs. It is not necessary to meet with clients at home, but the work space must exist. A copy of the closing statement on the home, copies of utility bills for the year, and measurements of the room or space are needed to figure the deduction amount. A percentage of all utility bills, mortgage payments, and property tax payments for the year is then calculated and deducted.

Remember to Keep Receipts

Every small business should have a system set up for saving and organizing receipts and statements. Always save all papers associated with small business purchases. It is much easier to get into the habit of tossing these receipts into a file folder or large envelope the same day the expenditure occurs, than it is to go hunting for them at tax time. Any receipt or record that turns out not to be deductible can be thrown out at when the return is filed. Better to have too many than not enough.

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