Are you looking for a new business partner? Consider Uncle Sam. The federal government offers a wide variety of tax breaks that could help your business not only survive, but thrive.
Bankrate’s Tax Guide
Some of the business tax breaks have been around for years. Others are new. More were added or enhanced under the Small Business Jobs Act that became law in the fall of 2010.
The government’s definition of a small business is one with sales of $7 million to $25 million a year and up to 1,000 employees. But Eva Rosenberg, a California Enrolled Agent and the publisher of TaxMama.com, says there are plenty of tax breaks that benefit much smaller operations.
Write off more expenses
Take Section 179, a deduction option named for the part of the tax code in which it appears. Under this provision, you can claim certain business expenses in the year in which they were made rather than depreciating the costs over several tax years.
The Small Business Jobs Act of 2010 allows for up to $500,000 in business expenses to be written off under Section 179 for both 2010 and 2011. That increased amount, double the previous limit, is so large that the average small business can write off all their asset and equipment purchases the year they buy them, says Rosenberg.
As for expenses you depreciate, the small-business bill offers help here, too. The 50 percent bonus depreciation provision also was extended, says Barbara Weltman, tax and business attorney and author of “J.K. Lasser’s Small Business Taxes 2011.”
As the name indicates, it’s a bonus tax break that applies after you’ve used your maximum Sec. 179 expenses. After you take the full $500,000 expending claim, you’re allowed to deduct an additional 50 percent of the adjusted basis of certain depreciable business property purchased and placed in service during 2010.
And if your business is new, there’s a tax break specifically for you. “The one-shot write-off of startup costs doubled to $10,000,” says Rosenberg.
Save on health care costs
Self-employed individuals are familiar with the ability to deduct the full cost of health insurance premiums to help cut their taxable income. For 2010, that health coverage cost also can help reduce self-employment taxes.
The health care costs still go on Form 1040, where they are subtracted from gross income to get a lower, adjusted gross income amount upon which taxes are calculated. But now those medical insurance costs also are subtracted from self-employment income on Schedule SE, the form self-employed taxpayers use to calculate Federal Insurance Contributions Act, or FICA, taxes that go toward Social Security and Medicare.
Since the self-employment tax is 15.3 percent — 12.4 percent for Social Security on earnings up to $106,800 and 2.9 percent on all income for Medicare — you’ll essentially get a 15 percent savings on the premiums, says Weltman.
Save on cell phones
Cell phones are critical business tools. They also were a source of extra taxes and administrative hassles.
The devices were categorized by the Internal Revenue Service as listed property, meaning business deductions were limited or disallowed unless the taxpayer substantiated the expense and business use and purpose.
That situation, however, has changed, thanks to the Small Business Act. The law de-listed cell phones and other similar telecommunications equipment, effectively removing the requirement that phone users keep detailed logs of business vs. personal use.
“Hallelujah!” says Rosenberg. “It’s a utility, for Pete’s sake!”
Don’t overlook deductions
In addition to the latest small-business tax breaks, there are plenty of oldies but goodies that can help lower tax bills. They include:
- Expenses related to business use of your auto, either the standard mileage rate or actual auto costs. Don’t forget to tally parking and tolls.
- Out-of-town business travel costs count, too, as do a portion of business meal costs.
- If your primary place of business is a home office, be sure to claim the deduction for that space.
- ATM fees, credit card fees and other bank charges incurred on your business accounts.
- Seminars, classes and training to improve your knowledge and skills in your current profession.
- Professional journals, newspapers and books you need to help conduct your business.
- Similarly, membership fees in trade organizations, professional groups and chambers of commerce.
- Internet access charges. But if you use the connection for business and personal purposes, you can only deduct the amount used for business.
Many of these deductions might seem small and some take extra work, but the tax savings can add up.