When it comes time to file taxes, many small businesses scramble to make sure that they have all their paperwork in place to minimize their tax liability. But even if the small business has all of their paperwork squared away, many times, they don’t realize there are certain small business tax write-offs that can help to minimize what they owe.
Why does your business need an accountable expense plan?
Small Business Tax Write-Offs
"As a small business owner, you don't want to miss out on the benefits of tax write offs," said Leslie Jorgensen, founder and CEO of Supporting Strategies, a provider of bookkeeping and operational support services to growing businesses. "Whether you outsource your bookkeeping to a firm like ours or handle it yourself, keeping clean, up-to-date books 12 months a year will make it easier for your accountant to take advantage of write-offs that put money in your pocket."
If you are doing your own taxes, be sure to keep these six commonly overlooked small business deductibles in mind.
Related Article: Tax Tips Every Business Owner Needs to Know
1. Start Up Costs
Before you even start the process of launching your business, you may have to do research to make sure there’s a market fit for your product or service. That might require you to travel, purchase goods to test things out, or conduct other forms of research.
In your first year of running your business, these costs can be written off from your taxes up to $5,000. If your costs go over $5,000, you can spread the remainder of that over 15 years, up to a maximum of $50,000.
The one requirement is that you actually have to launch the business you’re researching. If you wind up not going into business, you’ll have to eat the cost of that research.
2. Bad Debts & Interest
If your business lends money to someone and they don’t pay you back, you may be able to deduct this loss. It’s as if you'd invested in a business that didn’t pay off, and the loss can be used to offset your income to reduce your taxes.
At the same time, you may be able to claim deductions on interest payments you’ve made on business loans.
3. Previous Year’s Tax Deductions & Carryover
As described above with the start-up costs, you can only write off up to $5,000 in the first year. The remainder is then amortized over the next 15 years because the IRS does not want you to take the entirety of the deduction without limits in one tax year, so they require that you spread out certain deductions over a long period of time. There are other deductions that are treated similarly.
<ul> <li>Capital Losses</li> <li>Charitable Contributions</li> <li>Depreciation (An example of this is if you had bought property for your business. The value of that, over time, drops. You can write off that loss in value.)</li> </ul>
The inventory that your business carries can be a write-off, but the size of your business may impact when you can take this deduction. If you are a large business, you have to treat inventory in the accrual method of accounting. This means that you can’t discount the cost of the inventory until you’ve generated revenue from that inventory.
The IRS classifies a small business as one that has less than an annual average of $25 million in gross receipts for the three prior tax years and is not a tax shelter. If that’s you, you may be able to treat your inventory under the cash method of accounting, which effectively means you can write it off when you get it rather than when you sell it.
However, there are certain limitations on the types of businesses that can do this, irrespective of the amount of gross receipts in a year.
5. Your Employees
Your employees can, often times, be your single greatest tax write off. If you think about it, you compensate your employees in many different forms. For example:
<ul> <li>Salaries</li> <li>Bonuses</li> <li>Life Insurance</li> <li><a href="https://justworks.com/blog/offer-401k-as-small-business.html" target="_blank">401k Contribution</a></li> <li><a href="https://justworks.com/blog/pros-and-cons-offering-tuition-reimbursement" target="_blank">Education Reimbursement</a></li> <li>Gifts (up to $25)</li> <li>Profit Sharing</li> <li>Office supplies</li> </ul>
When in doubt, if you are spending money on employees to get their job done, that likely means you can deduct those costs from your taxes.
Related Article: What is Employee Expense Reimbursement and How Does it Work?
6. Small Business Health Care Tax Credit
The Affordable Care Act requires businesses with 50 or more full-time employees (including full-time equivalents) to either offer their full-time employees affordable minimum value health care coverage or be subject to a penalty. The government also offers a tax credit for some small companies under 50 full-time employees that provide insurance.
If you have fewer than 25 full-time equivalent employees, pay at least 50% of the health premium for your employees, and the average salary is $54,200, you may be eligible for this tax credit. While you lose this credit as your business grows, it may be an easy way to gain a competitive advantage over other small businesses that are just unwilling to pay for health insurance.
Bonus Tip: Talk to an Accountant
At the end of the day, there are plenty of small business tax strategies you can use so you can save money on your taxes. It’s always advisable to talk to an accountant and have them prepare your taxes rather than doing it yourself. While going without might save you the money you’d pay the accountant, you’ll miss out on their expertise. And did you know that you can likely write off the cost of the accountant on next year’s taxes?
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.