Small Business Tax Deductions

What is a "deduction"?

When we talk about deductions we usually talk about income tax deductions or things that lower your taxable income. A deduction is something that is permissable by code to reduce your tax liability, to reduce the income that is subject to tax.

What are some common small business deductions?

Some common business deductions are office supplies and telephone expenses. Deductions could also be an ISP hookup, rent (if you're paying it) on a separate facility, salaries. Deductions could also be travel, possibly meals and entertainment if you are meeting with people to promote your business.

What are some commonly overlooked small business deductions?

Probably the most commonly overlooked deduction for small businesses are retirement plans. Self-employed people and small businesses can have a multitude of plans set up, like profit sharing plans and defined benefit plans. This commonly overlooked deduction is a wonderful way to lower your tax liability, sometimes up to 25% of your net income. Another commonly overlooked deduction is often, people travel, and they don't always claim a deduction for the travel. It doesn't occur to them that that meeting with a prospective client or that meeting with a vendor could justify deducting all or part of the travel expense. So, be sure to look out for this commonly overlooked deduction, as well.

Can I deduct my car's purchase price as an expense?

Unless the car weighs more than 6,000 pounds, which some SUVs do, you generally can't write off the cost of a car under that expensing election, known as Section 179. You have to depreciate the car over a number of years, and it's usually five. If the car weighs more than 6,000 pounds, you can write off up to $25,000 in any one year.

Are the expenses I incur due to the benefits I offer my employees deductible?

Most expenses relating to benefits paid to employees - be it health insurance, educational assistance or a pension - would be deductible to the employer. Sometimes they may be taxable to the employee. One such a method that comes to mind is life insurance, when in excess of $5,000 of benefit, will be taxable to an employee. Generally, however, from an employer's perspective, most will be deductible.

Is my own health care plan deductible?

If you're an employee, you can deduct the cost of your own health and medical insurance as an itemized deduction. Whether or not you itemize is dependent on many factors, primarily if you own a home or have a large amount of state tax withheld from your check. If you're self-employed, you can deduct 100% of your health and medical insurance on page one of the tax return, which is a nice benefit.

What are the tax advantages of conducting business from a home office?

You may be able to avail yourself of quite a few benefits if you have a home office. One thing that's commonly overlooked on home offices is depreciation. To qualify as a home office it has to be used exclusively for business so it can be a room that you both work in and sleep in. It has to be for example a bedroom that has a desk and a couple of chairs but no place sleep. Assuming that you pass muster for claiming the home office. You can actually deduct a proportional amount of things like your utilities, your telephone, other things and you can actually depreciate a portion of your house base on the ratio of the square footage that you use for business to the total. So if that bedroom represents 10% of your home; you can generally depreciate 10% of the cost of you house. Know this has other implications, especially when it comes time to sell the house. So you want to speak to a tax advisor to make sure that things are being handled properly.

What is "listed property"?

Listed property could involve property that's used both for personal and business. The obvious piece of listed property that comes to mind is a car; you may use it half the time for commuting and personal reasons and half the time for business. There is a special space on the Depreciation Form, which is Form 4562, for listing listed property.