It doesn’t seem a long time since the close of the last tax return period. So you might mistakenly not be thinking about that aspect of your business until later on in the year. However, if you start preparing for your tax return now, it will be an easier job when the tax return season comes around again.
One of the key ways to save money on your tax return is to maximize your allowable deductions. Numerous small business owners think they do this and keep accurate records. But did you know that you are probably missing out on several tax deductions that could save you money?
Here are some of the tax deductions often missed by small business owners when they complete their tax return forms.
1. Sales Taxes
Did you realize that you have the option to deduct sales taxes or state taxes off your federal income tax? When you live and operate in a state that doesn’t have its own income tax, the potential savings are significant. Even in areas with state taxes, the sales tax break provides tax relief should you make a big purchase like a car. While you are obliged to itemize deductions, the IRS makes this easy to do and provides tables you can use as a guide.
2. Health Insurance Premiums
It isn’t just our business that we like to look after, but also our health. Medical expenses are costly and can sink any budget. The IRS is aware of this and sympathizes to a point. They allow insurance premiums to be deductible should they exceed 7.5% of your adjusted gross income. That is unless you are self-employed. Here you get the opportunity to deduct 100% of your premium cost and this gets deducted from your adjusted gross income, not as an itemized deduction.
3. Charitable Actions
Volunteering or helping a good cause can make us feel happier and can also help save money on tax returns. Most taxpayers realize they can deduct funds or goods they have provided a not-for-profit organization. However, if you were to help a charity with a fundraising event by selling cakes, drawings, etc. you can deduct the cost of the materials (or ingredients) used in those activities with your tax returns. It is also best that you keep receipts and itemize the costs for auditing purposes.
Likewise, you can claim the costs of babysitters should they be needed for you to attend a charity event. The rules are that you have to ensure you aren’t being paid for the charity work and that you can prove that the services were needed while you were volunteering.
4. Student Loan Interest
Generally, for tax purposes, you can only deduct interest from your tax bill if you are required to repay the debt. However, if your parents are paying back a student loan, the IRS treats it as if there is a transaction between the parent and the child, who then makes a repayment. As long as you are no longer claimed as a dependent, then you can deduct up to $2,500 of student-loan interest that has actually been paid by your parents. This is because the debt of a student loan is not the responsibility of the parent to repay, but the child.
5. Improving Skills
Improving your skill set is important if you want to succeed in life, not just business. The government recognizes this and therefore allows you to have a tax break on educational studies. The Lifetime Learning credit allows you to claim 20% of the first $10,000 you spend on education after high school, up to a maximum of $2,000 per year. While at the higher income levels the return isn’t as good, it can still offer some reward and the tax doesn’t discriminate based on your age.
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6. Social Security
It is not always the most popular ruling when it comes to being self-employed, but it is a legal requirement that you have to pay 15.3% of your income for social security taxes. Normally, this would be paid by both an employee and the employer, but without one, it's you that has to foot the bill. However, there is some hope. As a self-employed person, you can deduct 7.65% (the employer portion) of your income taxes. This could be a significant saving in the long term.
7. Military Duty
If you are a member of the National Guard or a reservist, you can deduct certain costs from your tax bill when you travel to attend drills. To do so, you must have travelled more than 100 miles from your home and stayed at another location for at least one night. The deductions allowed for this are the costs of any lodgings and half the meals. You also get an allowance for driving with fuel, parking and tolls.
8. Baggage Fees
Airlines are renowned for driving travelers crazy with their extra fees for various things like baggage, online booking and change of plans. For the airlines, this can be a lucrative source of revenue. For you, it’s a cost you'd rather not have. On the other hand, if you are a business traveler and self-employed, you have the opportunity to claim back these expenses on your tax returns by adding them to your deductible travel expenses.
9. Complicating Expenses
Tax breaks allowed by the US Government are continuously changing, so you have to stay up-to-date to get the best options for saving on tax when buying new equipment. Take ‘bonus depreciation’ as an example. In 2011, a business could use 100% bonus depreciation to deduct the full cost of a purchase of equipment from the tax bill. In 2013, the rate was reduced to 50% and at the end of the year, the deduction was expired. Then at the end of 2014, it was brought back in and expired again only to be revived again in 2015. Currently, the 50% bonus applies to equipment purchased by the company for 2016 and 2017 – but in later years it will be reduced.
Alternatively, you could look at supercharged expensing. This allows you to write off the full cost of any purchased equipment the year you start using it. Again, Congress tends to make it valid and not valid, but currently, you can claim up to $500,000 worth of assets in your deduction.
10. Unusual Business Expenses
If you can prove that your business needs to spend money to operate or perform at peak efficiency, then even the most unusual of purchases can be deducted from your tax bill. Previously there have been claims ranging from oils that bodybuilders need for competitions to cat food in junk yards to attract rat-catching strays. The important step to remember is to itemize and keep receipts and demonstrate why it is important for your business to purchase that item.
Running a small business is challenging, and so is completing your tax returns. So make it easy for yourself. Realize where you can make savings on your taxes now and you can start to prepare them straight away, making the process less time-consuming and infuriating when it comes to the next tax season.
Have you got a burning tax question? Do you want to know where you can save money on your taxes? Then speak to a member of the Ragain Financial team.
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