The clock is ticking toward the deadline for filing your 2015 income tax return, or at least asking for a filing extension. Before you file, don’t forget to check your eligibility for some important small-business tax deductions and credits and take required actions to nail them down.
Here are five frequently overlooked tax deductions and credits you should consider.
1. Small employer health insurance credit
You may be entitled to a tax credit of 50 percent of the premiums you paid for employees’ health coverage. While awareness of this credit has been growing, it’s still overlooked by some small-business owners. Don’t be one of them if you’re entitled to it.
To qualify, you must have no more than 25 full-time and full-time equivalent (hours of part-timers) employees, and your average payroll can’t exceed a set dollar limit. However, the credit applies only if you obtained coverage through the SHOP Marketplace, which is a government exchange. Learn more about the credit from the IRS.
If you’re self-employed, you can’t take this credit. However, you can deduct all the premiums for you, your spouse and dependents, as well as for your children under age 27 at the end of the year even if they are not your dependents, as an adjustment to gross income. You don’t have to itemize to take this deduction.
2. Tax deductions for equipment purchases
If you bought new tablets, office furniture, heavy machinery or other items in 2015, you may be able to deduct all or most of your costs (even if you financed the purchases in whole or in part) rather than spreading out depreciation deductions over a number of years. However, to be able to deduct your costs upfront, you must take affirmative action. Examples:
- If you want to use first-year expensing (the Section 179 deduction), which is up to $500,000 in 2015, you must elect this on your tax return; it’s not automatic. You do this by completing Part I of Form 4562.
- If you want to use the de minimis safe harbor, which allows you to deduct up to $500 per item or invoice as materials and supplies (instead of depreciating the costs), you have to do two things. You can’t capitalize the costs (which means you don’t add them to your balance sheet). And you must attach an election for this safe harbor to your tax return. This safe harbor simplifies your recordkeeping.
In business, you can pay a variety of fees, some of which are substantial, while others are nickels and dimes. All of these may add up to considerable tax deductions. Check for:
- Accounting fees that you paid in 2015 (e.g., for preparing your 2014 tax return). Note to self: Fees paid now for the preparation of your 2015 return will be deductible in 2016.
- Bank fees, including charges on checking accounts, ATM withdrawals and fees for other bank services.
- Legal fees to handle contract disputes, evict tenants and for certain other matters. However, fees related to the acquisition of property are not currently deductible; they’re added to the tax basis of the property.
Tax deductions and credits that you had in previous years but were unable to fully utilize because of tax law limitations may now be available for use. Check for carryovers of:
- Business credits. These can include the research credit and the credit for small employer pension plan startup costs, which are part of the general business credit. You have 20 years to use up a carryover of the general business credit.
- Capital losses. There is an indefinite period for using carryovers of capital losses.
- Charitable contributions. There is a 5-year carryover period.
- Home office deductions. There is an indefinite carryover period.
- Net operating losses. There is a 20-year carryover of these losses.
- Passive activity losses. There is an indefinite carryover period.
5. Transactions gone bad
Some actions you've taken in years past may not have turned out as you planned, but at least they may now provide you with tax breaks. Some may require you to file amended returns to take write-offs in the prior years, while others may trigger current deductions. Here are some prior actions to explore:
- Bad debts. If you lent money to an employee, vendor or other business associate, and the loan has gone bad, you can take a deduction. A business-related bad debt is deductible if it has become partially or wholly worthless. A non-business bad debt, such as a loan to a family member, is deductible only if it is entirely worthless and there’s no hope of any recovery. You have seven years to discover that the debt is defunct and amend the return for the year in which this situation occurred.
- Worthless securities. If you bought stock that is now worthless, you can take a tax deduction. You have seven years to discover your loss and amend the return for the year in which worthlessness occurred. If the securities were stock in your own small corporation, it may be Section 1244 stock, the loss on which is an ordinary loss up to $50,000 ($100,000 on a joint return). Find more information about Section 1244 losses in the instructions to Form 4797.
If you’re like most small-business owners, you work with a tax professional to prepare your return. Still, it’s up to you to discuss your situation and question your advisor about last-minute tax deductions and credits to which you may be entitled.
For more tips on how to help ease your way through tax season, access our exclusive guide, It’s Tax Time: A Business Owner’s Survival Guide.
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 financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL 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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