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12 Big Deductions for Small Businesses

by Thomas Kubiak

Operating a small business?  Want to start one?  Need help choosing a business entity?  Here are 12 categories of expenses you should track and trim off the top of your earnings, so keep all your receipts.  Only what's left over — net profits, not gross income — is taxable.
  1. Home office
  2. Office supplies
  3. Telephone
  4. Furniture
  5. Computers and equipment
  6. Software and publications
  7. Automobile mileage
  8. Travel, meals, entertainment and gifts
  9. Insurance premiums
  10. Retirement contributions
  11. Self-employment tax (Social Security)
  12. Hiring your child
Home office
A home office is the space devoted exclusively to your business.  It could be the room where you write invoices and do cold calls, or the garage where you store inventory or equipment.  The home office can be a section of a room, as long as it is used exclusively for business.  The IRS is unyielding on this point. 

The home office deduction is calculated using a percentage of the exclusive-use area to your total living space, or by using a simplified formula, whichever is more advantageous tax-wise.  The total cost of maintaining your home during the year includes rent or mortgage, homeowners insurance, utilities, and certain repairs.

Office supplies
You can deduct every office supply you purchase to carry on your business, like paper and pens and postage.  Each expense can offset your business earnings, trimming both your income tax and self-employment tax.  Do not include phone equipment, computers, software or furniture in this category.  These items may have to be depreciated over a period of up to seven years.

Telephone charges
Deduct 100 percent of the cost of telephone equipment and service that is dedicated exclusively to business use.  If, like most people, you also have a land line for personal use at home, those charges are not deductible.  But if you make specific long-distance toll calls from that phone that are itemized on your monthly phone bill, you can deduct their cost.  

Calls from a cell phone are business expenses, too.  For example, if you use your cell phone half the time for business, deduct 50% of your annual service fees,  including the cost of equipment. 

Office furniture must be depreciated.  A portion of your costs can be deducted as a business expense over seven years, or up to 100% can be taken as a Section 179 expense.  For the 2007 tax year, a business owner can expense up to $110,000 under Section 179, including acquisitions or furniture, computers and other equipment that the IRS deems as depreciation property.  Your Accutax tax specialist will elect the method that gives you the most benefit by comparing the tax savings this tax year with those over future years.

Computers and equipment
Items such as computers, copiers, fax machines and scanners also are tax deductible.  As with furniture, you have a choice: Take 100 percent up front or depreciate the cost, in this case over a period of five years.  Buy a cell phone?  Depreciate the purchase price over three years or expense it under Section 179.

Software and publications
Not long ago a company had to depreciate the cost of computer software over three years.  But now, prepackaged software can be fully expensed under Section 179 in the year purchased.  Trade magazines and subscriptions to business publications continue to be fully deductible in the year you pay for them.

Automobile mileage
Deduct the business use of your car one of two ways, depending on which method trims the most taxes.  The first is the standard mileage deduction method.  Add the miles put on your car or truck during the year and multiply by the standard amount determined by IRS.  You will also deduct toll charges, but as a travel expense.

The second is to compare your business usage against total usage for the year.  Track every associated expense, such as gas, repairs, lease or interest payments, and insurance.  Next, apply the percentage of business use to the total expenses.  For example, if 12,000 out of a total 20,000 miles are business use, and total automobile expenditures are $3,000, deduct 60 percent, or $1,800.

If your business is not home-based, driving to and from an office is considered by the IRS as commuting and cannot be written off.  But keep careful track of the distances in-between appointments or other stops you make while conducting your business, and put it in writing.

Travel, meals, entertainment and gifts
The entire costs of travel and life on the road are fully tax deductible — air, bus or train fare, car rentals, dry cleaning, hotel charges, and tipping.  But meals are only 50 percent deductible.  The IRS reasons you would eat at home anyway, or that if you have a meeting over a meal, the other half of the cost was incurred by the client.  The 50-percent deduction applies to the costs of entertaining your clients, too.  If you buy them gifts, 100 percent, up to $25 per person, is a deductible business expense.

Insurance premiums
Self-employed individuals who pay their own health insurance premiums may deduct the entire amount as a business expense, as long as the net profit of the business exceeds the amount or premiums.  This deduction is taken away if you participated in another health care program, such as your spouse's company medical plan.  You may also be able to deduct premiums for long-term care insurance for yourself, your spouse or dependents.

Retirement contributions
All contributions to a SEP-IRA, IRA, Simple IRA or Keogh plan come off your taxable income right on your Form 1040 or Schedule C, if you are self-employed.  Be careful not to exceed the legal contribution maximum.

Self-employment tax
Self-employed individuals wear the hats of both employer and employee.  That's why the tax code requires them to contribute double the Social Security as other workers, who share paying halves with their employers.  The total SE tax represents 15.3 percent of net profits, but in a small gesture of generosity, the IRS allows you to deduct half of the amount as a line item on your tax return.

Hiring your child
You may be able to trim some taxes by hiring your children.  There are triple benefits: You deduct their salaries as a business expense.  Neither you (the employer) nor your child (the employee) pay Social Security tax if the child is aged 17 or younger.  And your child can put the money aside in an IRA to save for the future.  This deduction is possible only if you operate your business as a sole proprietorship or as a partnership with only you and your spouse as partners. 

Posted December 31, 2015