For small businesses, tax season can be a big headache. The IRS Taxpayer Advocate Service reported that on average, small businesses spend almost 130 hours every year completing Form 1065 (partnership income) and more than 26 hours preparing Schedule C (see infographic). Add to that the hours small business owners spend working and it’s no surprise many overlook key federal tax deductions for small businesses that could help their bottom- line. With smart planning, tax time can become an opportunity for your business to save money by claiming all the tax credits and deductions you’re entitled.
In part one of a two-part series, Kathy Pickering, executive director of The Tax Institute at H&R Block, shares her tips for small business owners as they prepare for the April 17 tax filing deadline:
Many small business owners seek education and training related to their trade or business. What you may not know is that some of these costs for continuing education costs may be deductible and help to reduce your business income. But there are a few key things to watch for: First, the education or training must apply to your current line of work. It must either be required by law or regulations for keeping your license to practice or maintain or improve skills required in your trade or business. Second, if the education or training meets these requirements, specific expenses – even including travel – may be tax-deductible. For example, attorneys can deduct the cost of attending continuing legal education classes required by the state bar association to maintain their license to practice law. ;
2. Home Office
If you are like many small business owners, your office might be in your home. Thankfully, this usually means a generous tax deduction. When claiming a home office tax deduction, you must be careful, as home office claims are often reviewed in great detail by the IRS. To qualify, your office must be a separate room or area of the house and operate as your principal place of business. Generally, the area of your home you claim as a home office must be used exclusively for business, although there are exceptions for inventory storage and home-based day care businesses. You can deduct depreciation for the portion of your house used exclusively for your business, as well as a portion of home expenses (e.g., rent, insurance, utilities and maintenance) based on the size of the office area as a percentage of the entire home’s square footage.
3. Health Insurance Premiums
If you have fewer than 25 full-time equivalent employees who have average annual wages of $50,000 or less and you pay at least 50% of their qualifying healthcare premiums, then you should take advantage of the Small Employer Health Care Credit. This credit can mean up to a 35% deduction of a non-tax-exempt employer’s eligible premium expenses. If you employ people in multiple states, you can calculate your tax savings based on the average state premium, depending on the state in which each employee works.
If you don’t have employees and are considered self-employed you can deduct all of the premiums you paid through an insurance plan established for the business during the past tax year. This includes expenses for yourself, spouse, dependent and any nondependent child under the age of 27 against gross income at the end of the filing year. This would be an adjustment to your individual total income; therefore you don’t have to itemize to take this deduction. Keep in mind that if you or your spouse is eligible for health coverage offered by another employer you don’t qualify for this deduction.
If you are a small business owner who needs help calculating the potential impact of the new healthcare law on your business, including premium costs and employee coverage requirements, check out this calculator from The Tax Institute.
4. Cell Phones
Cell phones are indispensable for small business owners. The good news is you can deduct cell phone expenses related to your business under the regular rules for business property. The rules of what is deductible depend on whether the phone is your personal phone you also use for business or if it is a phone you use exclusively for business.
5. Start-up Expenses
In recent years our experts have seen a rise in the number of individuals starting small businesses, yet many don’t elect to deduct their start-up costs. You may be able to deduct expenses like advertisements to announce your opening, market surveys, transportation, facilities, training compensation for employees, salaries and fees for consultants or business travel. Small businesses can deduct up to $5,000 in startup costs immediately during your first year in business. If your startup costs are more than $5,000, then the remaining costs can be amortized over 180 months. For example, if you had $15,000 in startup costs incurred before your business began, then you could deduct $5,000 in the first year and the remaining $10,000 would be amortized and deducted over 180 months – or $55.56 ($10,000 / 180 months) for each of the next 180 months.