Small Business Tax Breaks, 2013
Not So Small
Taxes Don't Have To Be Dull
Small Business Deductions Schedule C
For those who are struggling to get their small business off the ground, tax time is often dreaded. However, there are a few pros and cons about being in business for yourself and you can use some things to your advantage. For instance, if you net less than 400 dollars for the year, you are not required to file.
The most important thing to keep in mind is that you need to keep your receipts for every expense, no matter how small. Almost every expense that you have can be directly deducted or depreciated. In addition, if you use part of your home as an office, you can deduct part of your home expenses such as: mortgage and home insurance, rent, utilities, and office equipment as long as you keep written documentation. There are a few other things that you need to know. Keeping a logbook of your business travel and mileage will benefit you come tax time. In addition, you are entitled to take full advantage of every tax break The IRS has allowed in their endeavor to keep small business afloat. Let's start with the home office deduction.
Tax Help (other than me)
Home Office Deduction
Sometimes a small business will operate out the home to save on overhead. While there are strict limits on what you can claim as a deduction, you still may be able to benefit. The general rule is not to allow the taxpayer to use their residence as a home office deduction (IRS, 2013). Thankfully, the IRS allows four exceptions to this rule:
- Home office is used on a regular basis and exclusively as a principle place of business
- Home office is used regularly and exclusively by clients, patients, or customers in the normal course of business
- Home office is a separate structure not attached to the taxpayer's residence
- A portion of the cost is allowed as a deduction if the residence is used on a regular basis to store inventory or product samples for said business. EX. Avon
These exceptions are all separate and only one is required to claim the home office deduction. In addition, any unused deductions due to set limitations may be carried over offset income in future tax years.
Just using a portion of your home as an office is also deductible. You can either divide the house by square feet or by the number of rooms. You can also deduct a portion of your mortgage interest, rent, insurance, real estate taxes and utilities. In addition, you can deduct a portion of the depreciation as a business expense.
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Secondly, keep a logbook for your business mileage. You can deduct either a percentage of your total transportation and vehicle expenses or a flat rate for your mileage, 56.5 cents per mile in 2013. If you drive your car for business 60% of the time, that will be the percentage of depreciation that you can deduct from your business income. In addition, maintenance of your vehicle and other travel related expenses can be deductible. If you decide to use the actual cost method for your transportation deduction, then you must keep accurate cost records. The IRS is a stickler on this point. I would suggest doing the calculations both ways and see which way gets you the bigger deduction. For instance:
J.T. Enterprises' salesman, Troy, drove a company vehicle a total of 22,000 miles in 2013. 90% of the miles were for business. The actual cost of gasoline, oil, repairs, depreciation, and insurance for the year was $10,000. If using the standard mileage method:
Standard mileage method
Business mileage = 22,000 x 90% = 19,800
19,800 x 56.6 cents per mile = $11,187
Actual cost method
90% x $10,000 (actual cost) = $9,000
In this particular case, it would benefit Troy to use the standard mileage method for the bigger deduction.
Other deductions for small business include travel expenses such as lodging, meals and rental cars. Airfare and train tickets can also be deducted given the right circumstances. However, no deduction for travel expenses will be allowed without proper documentation. Airfare and lodging must be substantiated separately, but you can accumulate meals and taxi fares if need be. You must have proof of the dates of departure and return for each trip and the actual number of business days. If you spend an extra couple of days sightseeing, these days are not deductible. The IRS even expects to be told the reason for the travel or the business benefit to be gained.
An alternative to reporting actual expenses is the per diem method, but there are more restrictions on this method and it is not recommended. So remember, if you are going to duke it out with the IRS, come prepared. They will do everything in their considerable power to deny the tax deduction or allowance. And yes, there will be a quiz at the end of the presentation.
Small Business Quiz
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© 2014 Mary Krenz