Lower your tax burden and free up cash to grow your business.
You work tirelessly to bring in revenue for your company. The last thing you want to do is give it all away in taxes.
A lot of small businesses appear to be doing just that though. In fact, the National Federation of Independent Businesses found that tax compliance costs are 67 percent higher for small businesses than larger ones. They add up to $18-$19 billion per year across the U.S small business environment.
With the complexity of filing taxes quickly each year, many small business owners miss deductions that can help lower their tax burden. Click or swipe for five potential deductions that are often missed and worth asking your tax professional about.
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1. Carryover deductions
While you may qualify for certain deductions and credits, are you taking advantage of them? For example, your expenses may have exceeded allowable amounts. Or, you qualify for a credit and it exceeds the tax you owe but the credit isn’t refundable. Perhaps you’ve had a net operating loss.
Carryover deductions include capital losses, net operating losses, charitable contributions, and home office deductions denied for the present tax year. Other carryover allowances include adoption tax credits, foreign tax credits, and credits for energy efficiency. Carry these types of losses, credits, and deductions forward into future tax years as a way to reduce taxable income.
There are many factors that determine how long you can carry such benefits forward and how to claim them. Check with your tax professional on these.
2. Out-of-pocket charitable deductions
Cash, non-cash items, and mileage to charitable events can quickly add up to a worthwhile deduction. You may not realize how much you can deduct if you itemize your tax deductions.
With cash donations to a public charity, you can typically deduct up to 60 percent of your adjusted gross income. You can also donate certain assets like property as long as you have held them for more than a year. These assets are deductible at fair market value for up to 30 percent of your adjusted gross income. You can combine more than one type of asset to maximize your charitable tax deduction.
The non-profit organizations that you donate to must be 501(c)(3) public charities or private foundations. Maintain good records of all these charitable contributions to substantiate the value of what you are deducting.
In 2019, the standard mileage rates for using your vehicle for a charitable purpose is 14 cents per mile. You can also opt to calculate the cost of using your vehicle instead. These costs include gas, maintenance, and repairs.
3. Losses on bad debts
While some decisions might cost your business financially, there could be a silver lining. You may be able to recover part of any bad debts by writing those costs off on your taxes.
To deduct these business losses, the debt must be valid and you must show you have a real investment in that debt. A good way to prove this is to have the loan appear on your business’ financial records.
To be valid, or bonafide, debt, there must be a proven debtor-creditor relationship. Proof includes some type of loan agreement form that the borrower has signed. Unpaid child support, wages, salaries, rents, interest or dividends are not considered bad debts.
In order to take deductions on bad debts, they must be written off during the year you’re taking the deduction. Also, you need to show you took reasonable steps to collect the money. If there’s no chance the debt will be repaid, then report it on your tax return. If you are unfortunate enough to have more than one bad debt to report, you must list them separately.
4. Business startup costs
If you have just started a small business, you can take advantage of it at tax time. Certain startup costs are tax-deductible. You can take up to $5,000 of business startup costs and claim them as a deduction.
However, not many founders can say they were successful enough in their first year to actually report income and need such a deduction. Some choose to amortize all of their startup costs, including those beyond the first $5,000, over a period of 15 years. This may help offset income and get more out of startup costs in the long term.
There are some startup costs the IRS won’t allow though. For example, any education or courses you took to prepare for your business don’t qualify as deductible expenses. Although business assets like equipment, vehicles, and buildings do count for tax purposes in terms of their depreciation, you cannot include them in the startup cost deduction.
If you have assets that have depreciated in value during the course of business, that depreciation can add up to an income tax deduction. In this category, many businesses take advantage of bonus depreciation and Section 179 deductions.
The bonus depreciation is useful for small business owners. They can take the deduction during their first year on business property purchases in addition to other depreciation. Think of bonus depreciation as accelerated depreciation when a business can deduct 100 percent of the cost of business property in the first year of use. You can use IRS form 4562 to claim bonus depreciation.
Use the same form to claim Section 179. Section 179 and bonus depreciation are similar. Section 179 lets you expense the cost of your qualified business property while depreciation then lets you to recover that cost over a certain period. You would take this deduction first if you have taxable profit to report. After that, you would take the bonus depreciation to reduce the rest of the business property cost over the course of its useful life.
Published by Debt.com, LLC