A dozen deductions for your small business
Small-business tax rule No. 1: Don't mess with the IRS.
But that doesn't mean you should cheat yourself. Take every legal deduction you can. Here are a dozen that even savvy small-business owners and entrepreneurs sometimes forget:
The deductible dozen
- Home office
- Office supplies
- Other equipment
- Software and subscriptions
- Travel, meals, entertainment and gifts
- Insurance premiums
- Retirement contribution
- Social Security
- Telephone charges
- Child labor
1. Home office
Concerned that claiming a home-office deduction is tantamount to sending an engraved invitation to an Internal Revenue Service auditor? Don't be, says Jan Zobel, author of "Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping."
"I don't agree that chances of getting audited are greater with a home-office deduction," says Zobel, a San Francisco Bay-area tax expert, who specializes in serving the self-employed. The key is that you use the term "home office" the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else. Deducting the den that houses the family computer and serves as a guest bedroom won't fly with Uncle Sam.
"If you only have one computer and you have a child over 4, the IRS is going to be pretty certain that the child is using the computer," says Zobel. "And the burden of proof is on you."
The deduction, however, isn't limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses -- rent, mortgage, insurance, electricity, etc. -- that you can claim.
2. Office supplies
Even if you don't take the home-office deduction, you can deduct the business supplies you buy. Hang onto those receipts, because these expenditures will offset your taxable business income.
When your office supplies are more than just pens and paper, you have another tax-cutting opportunity.
Office-furniture acquisitions provide a couple of choices. Deduct 100 percent of the cost in the year of the purchase or deduct a portion of the expense over seven years, also known as depreciation.
To take the whole cost in one tax year you'll use the Section 179 deduction (named for the part of the tax code where the law appears). Recent tax-law changes have made this deduction even more attractive. Stimulus measures increased this deduction to $500,000. However, unless Congress acts again, the Section 179 limit for 2014 is just $25,000.
If you choose instead to depreciate the desks and filing cabinets, you can't simply split the cost into equal portions over the depreciation period. Instead, you must use an IRS chart to make separate calculations each year.
Which is better for you? Anticipate the times that your business will need these deductions the most. Both options are reported on IRS Form 4562.
4. Other equipment
Items such as computers, copiers, fax machines and scanners also are tax deductible. As with furniture, you can take 100 percent up front or depreciate (this time over five years).