Almost every cost in your business can be written off as a deduction or tax credit, but many small-business owners still don't do this. This can result in paying more in taxes than the law requires. Here are some ways to look for write-offs you may be eligible for on your 2014 return.
Credit for Paying Employee Health Costs
While you’re not required by law to pay some or all of the premiums for employee health coverage, if you paid at least half in 2014 you may be eligible for a credit of 50 percent (e.g., if you paid $20,000 and this was more than half of total premiums for your staff, the credit is $10,000). This credit amount for 2014 is greater than in 2013. Eligibility requirements are complicated, so check the instructions on Form 8941.
Premiums for you (the owner) and family are not part of this credit. But if you’re self-employed or a more than 2 percent S corporation owner, you can deduct all of your premiums as an adjustment to gross income (no itemizing required).
Prior year deductions and credits that were not fully claimed because of income limitations and other restrictions may be taken this year (assuming they are not otherwise limited). Business-related carryovers to remember:
- Capital losses
- Charitable contributions
- General business credit, which includes most business credits
- Home office deduction
- Passive activity losses
Don’t Be Afraid of Tax Audits
Being careful is one thing, but not taking write-offs for fear they may trigger an audit is quite another. What’s more, even if a particular deduction is an audit red flag, being able to prove eligibility for the write-off justifies the risk. For example, some believe that a home office deduction invites an audit, but there is no proof of this. So if you work from home and meet home office deduction rules, take the deduction.
Use Special Tax Breaks for Small Businesses
It’s a general rule that inventory items are not immediately deductible. Instead, a business with inventory uses the accrual method of accounting and includes inventory items in the cost of goods sold, which reduces the amount of income recognized on the sales. But under a special rule, small businesses can use the cash method of accounting and opt to treat inventory items as currently deductible materials and supplies.
Businesses with annual average gross receipts not exceeding $10 million for the three prior years, or the years in business if less than three years, that essentially are service-based but keep inventory, such as a beauty salon that provides hair-cutting services but also sells shampoos and conditioners, can qualify. This write-off option is explained in Rev. Proc. 2002-28.
Find Fees You Paid
It’s common to pay an array of fees in the course of your business. Some may be substantial and hard to overlook; others may be minimal but can add up:
- Accounting fees. Remember to include what you paid a tax return preparer in 2014 to prepare your 2013 return; it’s deductible on the 2014 return. What you pay now to prepare your 2014 return will be deductible next year.
- Bank fees. Charges for checking accounts, ATM withdrawals and other bank services are deductible.
Turn the Table on Taxes
Don’t overlook deductions for business-related taxes. For example, employment taxes (e.g., employer share of FICA, FUTA, state unemployment taxes) are fully deductible from business income.
For those who are self-employed, one half of the Social Security and Medicare taxes you pay on your net income is a personal (not a business) deduction taken on Form 1040, but no itemizing is necessary.
Show Interest in Interest Payments
Interest paid on business loans is fully deductible. If you financed the purchase of business equipment on your credit card, the interest is a deductible business expense.
However, if you paid any interest on a tax bill for your Form 1040, you can’t deduct it as a business expense. This interest is viewed as a personal expense even though arising from business activities.
Make Smart Elections
The tax law often gives you choices on how to treat costs. The elections you make can optimize current write-offs. For example, if you purchased equipment or machinery for your business, you may be able to deduct the cost in full rather than having to depreciate it over a fixed number of years. For 2014, there’s a first-year expensing deduction up to $500,000, which must be elected if eligible to do so. And there’s a 50 percent bonus depreciation that applies automatically to most new (not pre-owned) property, but this election can be waived. Depreciation and these accelerated write-off options are explained in Publication 946 (note that 2013 rules apply for 2014).
Financial Losses Can Be a Tax Benefit
Suffering a financial loss may entitle you to a tax write-off. For example, if you lent money to an employee, a vendor or someone else and haven’t been repaid, you may be able to deduct the loss. How you treat the write-off (as a business loss or capital loss) depends on whether the debt is a business bad debt or a nonbusiness bad debt; follow IRS rules.
Finally, look at last year’s return to remind you of deductions previously claimed so you don’t overlook them now if you qualify to claim them. Work with a tax advisor for other write-off options that apply to you.
Read more articles about taxes.
Barbara Weltman is an attorney, author of J.K. Lasser’s Small Business Taxes and J.K. Lasser’s Guide to Self-Employment, and professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com. Follow her on Twitter @BarbaraWeltman.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any tax strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL TAX ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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