Small Businesses and Individual Professionals can Save on their Taxes
Taxes are the biggest expense for most Small Businesses and Individual Professionals. And yet most of us provide minimal time for planning and reducing this expense, except perhaps an annual visit to the accountant’s office during taxes! Is it any surprise then that Small Businesses and Professionals contribute the most to Tax Revenues?
Large Corporations with help from expert tax professionals pay at a much lower effective tax rate. An extreme example is that of Goldman Sachs which paid an effective tax rate of 1% on a $2.3Billion profit last year. Independent studies over the years suggest that Small Businesses pay up to $150 Billion in excess taxes each year. This is money you can save through proper tax planning. As with everything else in your business, it takes careful planning and professional execution.
There are over 350 Tax Deductions and Credits for Small Businesses and Individual Professionals. Although it is almost impossible to say how many of these may be applicable to your specific business without considering your particular scenario, here are Top Tax Deductions that may apply to most Small Businesses and Professionals.
Top 5 Tax Deductions for Small Businesses and Professionals
1. Start-up Expenses
As you Start up your business, there are several Start up costs such as furniture, equipment, Computer, Fax etc that may be deducted 100%. Section 179 of the Internal Revenue Code allows you to deduct up to $250,000 of the cost of new equipment or other assets in 2009. Off the shelf Software costs can also be now deducted in the same year as per Section 179.
Although if you know that your new business is going to take a couple of years to break even and generate profit, you may want to depreciate these expenses over the years to offset the profits in later years.
2. Business Travel, Meals and Entertainment
If you make a trip for business purposes, travel costs including Airline ticket, Hotel, Taxi, Meals, Shipping business materials, Laundry, Telephone calls, etc are fully tax deductible expenses. As a new enterpreneur it is always difficult to find time for vacations. How about combining business travel with pleasure? It is allowed, as long as the primary purpose of the trip is for Business, although there are strict guidelines on this.
3. Charitable Contributions
This is a great tax deduction as you can feel good about donating to your favorite cause and save on Taxes at the same time. There are some important rules for charitable contribution deductions:
- Only contributions to charities listed as ‘qualified organizations’ by the IRS are tax deductible andcontributions more than $250 will require a written acknowledgement from the qualified charitable organization.
- the value of time or services that you volunteer are not tax deductible.
- Property or Equipment donations can be deducted at their fair market value. Although a fully depreciated (written off) asset cannot be deducted as a contribution even if it works well.
4. Bad Debts
Bad Debts hurt the most. Especially when you have worked so hard to satisfy all of the customer’s requirements and they do not pay you. The good news is that certain bad debts are tax deductible.
If your business sells goods, you can deduct the costs of any goods sold, but did not get paid by the customer. However, you cannot deduct the opportunity lost in making profits on the sale. If your business provides services, no deduction is allowed for the time you devoted to the customer who doesn't pay. For example if you provide medical services and the patient does not pay, you cannot deduct the cost of the time you spent in treating the patient.
5. Home Office Deduction
For several years taking a Home Office Deduction was considered a red flag, inviting the IRS to Audit your tax return. But that may no longer be the case, with more and more businesses and individuals taking advantage of working from home and maintaining a healthy work-life balance. IRS is well aware of the rising trend in working from home office. As long as you use the ‘Home Office’ as IRS defines it. This one deduction alone can save you several thousand dollars in tax.
For example if you are an independent Information Technology contractor and mostly work out of your client’s office, however you use part of your home to manage the administrative aspects of your profession or business, you may qualify to take the Home Office deduction. IRS has specific rules to qualify to deduct expenses for home office. See a more detailed article on Home Office Deduction (Insert Link to Next article).
Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully I have got you started thinking about saving more of your hard earned money and paying less to the IRS as you brave through the economic head winds in a recession. Consult your Tax Advisor regarding your individual situation.