It’s well-known that most small businesses do not expect to make much profit, if any, in their first two years. A large minority of new businesses, between 30 and 40 percent, don’t survive even that long. While lack of experience and naivete certainly factor into some of these failed or struggling businesses, a large portion of the concerns are financial.
An often overlooked way to offset some of the financial burdens that come with starting any business is to reduce your company’s taxable income by deducting expenses from top-line revenue. There are seemingly endless options for tax deductions available to small businesses, particularly BSCs which often have a heavy reliance on transportation and materials. What’s more staggering than the abundance of tax-deductible expenses available to small businesses though, is the number of small businesses that don’t take advantage of tax deductions.
The following strategies can help you gain an advantage when it comes time to assess your company’s tax obligations:
1. Know the Code: Much to the chagrin of small business owners and accountants, the tax code is in a constant state of flux. Tax breaks, and the rules that govern them, change every year. Stay on top of the tax code to make sure you aren’t missing out on new tax breaks or a change in the guidelines. Sections 161-291 pertain to deductible and nondeductible tax items. The IRS lists changes in tax laws as they occur on their Twitter feed, @irsnews.
2. Know Your Deductibles: If you think that a business expense is deductible, chances are it probably is. Just make sure to follow the rules and guidelines for each deduction, as laid out by the IRS, and be sure to figure out what forms to fill out for each deduction. Getting the Most Out of Your Business Deductions
Sure, that sounds like a lot of reading, but it’s also a lot of potential money on the table. Here is just a sampling of the types of tax breaks that may be of interest to a BSC, with the applicable Form listed, if available):
• Startup Costs: If you’re a fledgling company, you can deduct startup and organizational costs, up to $5000 for each, for the first year or amortized over a 180-month period. These costs include market research, advertising, employee training, business-related travel, legal advising and other expenses. It’s nice to get off on the right foot. (Amortization deductions should be shown on Part VI of Form 4562)
• Employee Pay and Benefits: You can deduct your employees’ pay if the payment is in cash, goods, or services. Benefits like health plans and life insurance are also, in many cases, tax deductible.
• Automobiles: If your company uses one vehicle or an entire fleet as part of its business, the cost, mileage, and maintenance of those vehicles are tax deductible. You have two options for vehicle deductions: you can go by a fixed amount per mile, or you can deduct actual expenses, such as gasoline and maintenance. It’s up to you to choose the option that would deduct the most from your taxable income. Receipts and documentation are crucial for vehicle deductions, so keep track of everything. (See IRS Publication 463 and Form 8910 for more info.) • Equipment: Automobiles aren’t the only kind of tax-deductible equipment. Virtually any piece of equipment you purchase for your business is deductible. This includes office supplies (pens, paperclips, etc.), computers, fax machines, telephones, boxed or downloaded software, furniture, and even magazine subscriptions. Furniture and hardware can be deducted in one tax year or depreciated over several. (Check Section 179 for more info.)
• Travel and Entertainment: Lodging and traveling expenses are deductible, from your hotel room on down to your dry cleaning. Meals taken while you’re traveling are also deductible. However, while all travel expenses are 100-percent deductible, meals are only 50-percent deductible. So, stay at the Hilton, but eat at the Hardees. Entertaining clients is also deductible, but like meals, only by 50 percent. All deducted entertainment costs must take place in a business setting, during business discussions, or before or after a business meeting.
• Utilities: All water, power, trash, and telephone bills are 100-percent deductible.
• Taxes: Yes, taxes incurred on your business operations are tax deductible.
• Less well-known deductibles: license and regulatory fees, legal services, rent (on your business property, unless you have equity), service fees (on credit cards, for instance), petty cash and tips, theft and loss, interest and insurance premiums.
• Special deductions: It bears repeating that the tax code changes every year, and deductibles are added and removed just as frequently, so keep your ear to the ground for limited-time tax breaks. For example, new legislation has brought about tax changes to help alleviate the stress of the recent recession on small businesses. The deduction for capital expenditures on fixed assets increased from $200,000 to $500,000 in 2010. Additionally, a reduction in capital gains taxes on small-business investments, and greater ease for small businesses to deduct the cost of cell phones have also recently gone into effect.
3. Know Your Records: All of this information becomes obsolete if you don’t follow this simple rule: save your receipts. Save all documentation and records of purchases and expenses. The IRS loves records and receipts, and who can blame them? If they’re willing to deduct 100-perent of your stay at the Bellagio during that business trip you took to Vegas (the one where you just happened to win big at the blackjack table), then they’re understandably going to want to see some documentation.
4. Know Your Credits: While credit card interest rates are one of the available deductions, here we’re referring to tax credits. Tax credits differ from deductions in that credits save you tax payments dollar-for-dollar, while deductions shave off a percentage of your taxable income based on your tax bracket. Here are a few of the available tax credits for BSCs:
• Small Business Health Care Tax Credit: If your small business is one of the estimated 15 percent of companies that provide employee health insurance, then you can take advantage of this credit that can cover up to 35 percent of premiums you pay for workers.
• Work Opportunity Tax Credit: If you hire veterans, then you may receive up to $9600 in the form of a tax credit.
• Empowerment Zone Credit: If your business is located in a congressionally designated empowerment zone, you can claim this tax credit. (Refer to IRS Form 8844 for details)
• Environmentally Friendly Tax Credits: Keep an eye out for environmentally friendly options to green up your business. For example, you may eligible for a tax credit if you buy a hybrid car for business use.
• Disabled Access Credits: Make improvements on your business location to help ease of access for disabled citizens, and you can earn your company a tax credit of up to $5000 on your expenditures.
• Retirement Plan Startup Credits: Any 401(k), SEP, or SIMPLE retirement plan started by your company for its employees can earn a credit of up to $500 toward your startup expenses. (Use IRS Form 8881)
Nobody likes the extra work that comes with crunching numbers, but small business owners should keep in mind that they are a crucial vertebrate in the backbone of our economy. Not to mention, the government has shown that it is willing to bend over backwards in order to ease tax burdens on small businesses, particularly burgeoning ones. That said, even if you’re personally very financially savvy, hiring a professional accountant or bookkeeper to stay on top of your company’s tax situation can pay off big time in the long run. The above advice is for informational purposes only. Always consult with a certified accountant or other tax professional when preparing your returns.