Tax Credits & Deductions for Small Businesses
Tax credits and deductions can make a big difference in a small company's bottom line. From the expense of opening to the cost of hiring workers, small-business owners can claim a number of company-related write-offs. As with any credits or deductions, it's essential to record each cost on the books and keep receipts with notes on the purpose of the expense. Plus, many deductions and credits come with exceptions, so read Internal Revenue Service publications or talk to an accountant about write-offs you plan to take.
From business loans to consulting services, entrepreneurs can write off a number of startup expenses. Small-business owners can deduct $5,000 for costs including state filing and legal fees to set up a corporate entity, such as a limited liability corporation. Once owners open their doors, federal law lets them claim another $5,000 in office decorating, advertising and promotional materials such as free samples. Interest on any loan that covers business expenses is also deductible. An existing small business that launches a new product or service can claim a research and development credit, as well. However, if an entrepreneur spends more than $50,000 on a startup in one year, that $5,000 deduction gets smaller.
Small-business owners can claim a number of office-related write-offs, both at home and at work. Entrepreneurs can deduct a home office by measuring the square footage of the space and calculating the area’s percentage of the home’s total size. They can then deduct that percentage from their housing payment, utilities and homeowners’ insurance. To qualify, the home office must be dedicated to the business, and can’t double as space for another use. Small-business owners can also deduct office supplies. They can claim furniture, computers and copiers, as well: Federal law allows business owners to claim either 100 percent of the cost in the purchase year or to deduct part of the cost over seven years. Equipment write-offs can total as much as $250,000 in one year. Even the use of office equipment can be deductible, in the case of computer software and bills for cell and landline phones.
From driving to meet clients to eating out during conventions, small-business owners can write off company expenses related to travel, gifts and entertainment. As of 2012, the IRS reimbursed travelers 55.5 cents a mile, as well as tolls and parking, for business-related car trips. Federal law also allows deductions for leases on business cars, or write-offs of loan interest and depreciation on purchased business cars. Business owners who attend conventions or trade shows out of town can claim airfare and hotel costs, plus 50 percent of each restaurant meal. Gifts for clients or employees are 100 percent deductible at a rate of up to $25 per person each year. Small-business owners can also deduct the cost of continuing education, and travel to training, if it’s in their current line of work.
Tax rules give breaks to self-employed entrepreneurs who save for retirement through SEP-IRA or Keogh plans. Contributions are deductible on personal income tax returns for the self-employed. Also, self-employed workers or startup owners have to pay 15.3 percent of their income toward Social Security. That’s double the contribution they would pay as employees, because they have to cover both the employer and employee side. However, they can deduct half of their Social Security contribution on their income tax return. Plus, business owners can deduct wages for a spouse employed in a sole proprietorship or S-corporation, and defer that income to a retirement plan.
Small-business owners can tap into tax benefits to cut the cost of hiring and keeping workers, including themselves. Companies with 100 or fewer employees get a tax credit of $500 a year if they start an employee retirement plan. Businesses with the equivalent of fewer than 25 full-time employees making an average of less than $50,000 a year can claim a credit through the Small Business Health Care Tax Credit. The credit gives companies up to a 35 percent tax credit for covering at least 50 percent of the cost of single health-care coverage for workers. That break is scheduled to jump to 50 percent in 2014. Plus, self-employed workers can write off their insurance premiums. Sole proprietorships and partnerships between spouses don’t have to pay Social Security or Medicare taxes on related children they hire, as long as they’re 17 or younger.