Despite various “tax simplification” pushes in congress over the years, the truth is that the U.S. tax code is an extremely complex system. As a result, many small business owners may be missing out on business tax saving strategies they are eligible for but don’t know about.
While you may already be aware of some of the deductions listed below, are you familiar with all of them? If the answer is no, reading through them may help you find ways to further reduce your tax liability.
Typically, inventory can’t be written off right away. Using the accrual method, inventory items are included in cost of goods sold. This lowers the amount of income accounted for on sales. There is a special rule, however, that allows certain small businesses to employ the cash accounting method and choose to account for inventory items as materials and supplies, making them currently deductible.
Currently, to qualify as a small business for this deduction, a company’s annual average gross receipts must be $25 million or less over the three prior years – or the number of years in business if less than three. Additionally, only small businesses in specific types of industries, basically service-based ones that keep inventory, qualify. Businesses that meet the qualifications and want to move from accounting for inventory using the cost of goods sold method to the materials and supplies method are required to file with the IRS to make this change using Form 3115. This deduction is explained more fully in Rev. Proc. 2002-28.
2. Home Office Deduction
While it’s commonly thought to be a magnet for an audit, there is no solid proof that taking the home office deduction is a red flag for the IRS. Additionally, it makes no sense to not take a deduction that you are qualified to take. The home office deduction can be a powerful money saver for those who can legitimately claim it as one of their tax saving strategies. The two conditions necessary to legally take the deduction are, first, using the workspace as your principal place of business or for another allowable reason and, second, using the area exclusively and regularly for business. The IRS publication on the business use of your home has more details on this deduction: IRS Publication 587.
3. Fees for Accounting Services
The fees you incur for helping complete your tax return can be deducted on the next year’s tax return. Make sure to either pay the invoice for tax preparation services through your business bank account or reimburse the invoice, if paid personally, from your business account.
4. Expenses for Starting a Business
Money spent prior to do market research on starting up a business, or other expenses incurred prior to opening a business can be written off in many cases. As much as $5,000 in startup costs of this type are deductible. Any costs over $5,000 can be deducted over a 15-year period. If these costs are greater than $50,000 certain limitations apply. This IRS publication provides more information on business expense deductions as tax savings strategies: IRS Publication 535.
5. Bad Debts
You can claim a deduction for funds that you have lent for a business-related purpose, such as to a vendor or an employee, that haven’t been repaid. Additionally, if a customer fails to pay money that is owed, your business may be forced to enlist a collection agency to try and collect the debt. The fees you pay these agencies can also be written off, as the IRS allows businesses to expense all costs linked to collecting and settling debts.
6. Fees Paid to Banks
Any fees charged for setting up and maintaining a bank account, including withdrawals from ATMs and other bank services, are fully deductible.
In cases where your business couldn’t take certain types of deductions in previous years, you may be able write them off in the current tax year. This includes carryovers attributable to charitable contributions, capital losses, passive activity losses and home office deductions.
8. Education and Training for Employees
If a business owner or the company’s employees attend conferences for educational purposes, such as training programs or even some networking events, these can be considered deductible expenses and tax savings strategies for your business.
9. Credit Card Fees
A business that takes credit card payments can write off transaction processing fees. Additionally, any expenses for annual renewal fees or penalties for late payments can also be written off.
10. Interest on Business Loans
Any interest incurred from a business loan is deductible in the year paid. It’s important to make sure that the loan is either for an asset completely used for the business or, if only partially used for business purposes, only write off the percentage of interest attributable to business usage of that asset, whether a car or computer or other asset used for both personal and business purposes.
While these tax savings strategies are an excellent place to start, they are the tip of the iceberg when you want to reduce your income tax bill with Uncle Sam. If you are interested in discussing your specific tax situation and understanding how much you’ve been overpaying in your taxes, book a discovery call today!