Deductions are an offset to your revenue, limiting the amount of taxes you’ll pay on your revenue. Unfortunately, some small businesses fail to take every write-off they’re entitled to and wind up overpaying their taxes. Here are five deductions you should not overlook.
1. Home Office Deduction
More than 52 percent of small businesses operate from home, yet many fail to claim a deduction for the business use of their home. There are a couple of reasons for this: First, small-business owners believe the deduction is an audit red flag, and second, they figure that the deduction is complicated. Both of these reasons should not prevent you from taking the write-off if you're entitled to it.
The IRS has not provided any audit statistics on this matter, but anecdotally there does not seem to be any truth to the belief of the "audit red flag." In any event, even if there is an examination, the deduction will likely be allowed as long as the owner is eligible for it. Be sure that the space in the home is used regularly and exclusively for business (for example, running a business on the kitchen table used for family meals is not “exclusive” use). Also use of the space must meet a home office test (e.g., it is the principal place of business). A business lacking any commercial space likely can meet this test.
Read More: The New Home Office Deduction: Do You Qualify?
Figuring the deduction is a little tricky because it's based on a portion of personal expenses for the home. For 2012 returns, only the actual percentage of these expenses, such as utilities, homeowner’s insurance, and rent or depreciation on a home that’s owned is deductible. Starting on 2013 returns, there will be an option to use a simplified standard home office deduction.
Find more in IRS Publication 587.
Whether you use off-the-shelf software or subscribe to cloud-based services, you can deduct your costs:
- Desktop software—Deduct the cost in full in the year the software is bought and placed in service using the first-year expensing (the dollar limit for this deduction in 2012 is $500,000).
- Cloud-based services—Deduct monthly charges; there is no dollar limit.
If you create software specifically for your business, different rules apply.
3. Smartphones and Tablets
No business can do without these technology tools and the associated costs are tax deductible:
- Acquisition costs—Smartphones and tablets are “capital equipment” items, the cost of which can be fully deducted using first-year expensing (described earlier) in the year they are bought and placed in service, as long as they are bought for business use and the business is profitable. If the business has a down year, it can still write off half the cost using “bonus depreciation” and claim a regular depreciation allowance for the other half.
- Monthly service charges—The full monthly bill is deductible. This is so even if there is some minimal personal use of the smartphones or tablets.
If you don’t have any other phone or tablet for personal use, then deducting costs for these items is more complicated. Some charges may be deductible, but those for personal use are not.
For more also see IRS Publication 946.
4. Incidentals on Business Trips
Little things can add up to big deductions if you’re a frequent business traveler. Laundry, cleaning, lodging taxes and landline calls are all deductible. Even if employees' business travel using the government’s per diem allowance is utilized, which covers lodging, meals and incidentals, both the allowance and a separate deduction for these other items can be claimed. The IRS says they are not part of the incidentals within the per diem allowance.
Also, don’t forget fares for taxis, buses, subways and trains. Don’t worry about not getting a receipt; amounts under $75 don’t need them as long as you keep track of these costs.
For more see IRS Publication 463.
5. Self-Employment Tax
Self-employment tax to cover Social Security and Medicare taxes for self-employed individuals is partially deductible. The deduction is not a business write-off; it is taken from gross income (page 1 of Form 1040), and no itemizing is required.
Read More: Tax Breaks That Can Help You Hire and Keep Employees
For 2012, the portion is the so-called “employer-equivalent portion,” which is less than half of the full tax payment because of the payroll tax holiday in effect in 2012. In 2013, the deduction is one-half of self-employment tax without regard to any Medicare surtax paid by self-employed individuals considered to be high-income filers (earnings over $200,000 if single; $250,000 for joint filers).
For more information see Schedule SE of Form 1040.
Scour your receipts, credit card statements, appointment books and other records to uncover deductible items you may have overlooked. Talk with your tax advisor to learn how to nail down these and other write-offs for your business.
Barbara Weltman is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com.
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