According to National Federation of Independent Business (NFIB), here are a few tax deductions that small business owners often make mistakes with:
- Mileage: Be sure you’re deducting trips to meet with clients, run work-related errands and attend meetings and networking events, particularly with personal vehicles. You will need to log the date, destination, and start and end mileage for each trip. It's always a good idea to keep some sort of mileage log that documents the use of your vehicle for business.
- Asset deductions. Section 179 of the IRS Code allows small businesses to take a depreciation deduction for certain capital expenditures in one year, rather than depreciating them over a longer period of time. If you’ve been hit hard by the recession, that could allow you to keep a bigger chunk of money in the short run. Most tax preparers will automatically try to take the Section 179, 'if they know about it'. In certain situations though, you may not realize that you have larger deductions available, such as if you were to enter into a LEASE for equipment (you will rarely see auto loans like this)that is eligible to be capitalized, where the lease calls for a purchase amount at the end of the lease for substantially less than fair market value, typically a dollar or so. So, make sure your accountant/tax preparer is provided copies of any significant purchases.
- Specialty items. If you own a building, you may be entitled to state and federal tax savings for building improvements, like adding special wiring or a soundproof room. Certain assets related to such projects qualify for accelerated depreciation, meaning you can take larger tax deductions over a shorter period—increasing your cash flow and lowering the cost of capital in the years following the project.
- Charitable donations. Sometimes it may make sense for the business to make the charitable deduction rather than it coming from personal funds. It's always best to see if there's a business purpose to the contribution, such as advertising. If's it's not a business expense, then the question is whether a charitable contribution in the name of the business makes more sense. If your company makes the donation, it can take a deduction and lower both its federal and state taxes. The less money your company makes, the less you will be taxed on your Form 1040, particularly if it can reduce your wages if you receive a W-2 as an employee.
- Bad debts. If someone owes you money you cannot collect, you may be able to deduct that as “bad debt” as an expense on your business tax return. While bad debts are mainly the result of credit sales to customers, according to the IRS, they can also be the result of loans to suppliers, clients, employees or distributors. Keep in mind however, that in order to be able to deduct bad debts in your business , you generally can not be a cash basis taxpayer.
- Supporting items. Remember to file receipts for any purchases that are related to your business. Expenses related to conferences, new software and accounting services are frequently overlooked.
- Loan interest. Have you borrowed money against a personal loan, like a mortgage, to purchase equipment for your business? You can write off the interest on personal loans, provided you’ve invested the money into your company. Just be sure to document how it was used in case of an audit.
Steven A Feinberg, CPA of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire, has more than twenty five years experience in Federal and New Hampshire issues, specializing in small business general, tax and payroll matters. For additional information on these and other current business and tax issues, email Steve at firstname.lastname@example.org or call (603) 434-2775.
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