It’s tax season and as uncanny as it may sound, hundreds of small businesses happen to overpay their taxes. The major reason behind this phenomenon is that the business owners miss out on numerous legitimate deductions. John Gregory, tax practitioner and founder of 1040Return.com, shares 5 tax deductions for small business to consider.
“Claiming tax deductions would cause the taxable income to shrink and ultimately reduce the amount of taxes payable,” says John Gregory EA, tax practitioner and founder of 1040Return.com. “The fear of showing up on the IRS’s radar and putting themselves at the risk of being audited is very common among the taxpayers. Hence, many of the small business end up missing out on several tax deductions that they are actually entitled to claim.”
Here are a few tax deductions that most business should consider claiming so you can potentially save hundreds and thousands of dollars in taxes:
· Start-up Cost. There are two components of the method of availing deduction for start-up cost of your business. IRS allows you to deduct a portion of the start-up cost in the first year of commencement of business. The remaining portion is amortized over the next 15 years / 180 months of business, beginning from the month in which your business becomes operational. The amount that you can deduct in the first year itself depends on the total start-up cost.
· Reimbursed Expenses. The employees that are a part of your small business might need to incur expenses in the course of fulfilling their professional responsibilities. You as an employer reimburse the expenses incurred by your employees. Many small-business owners do not realize that the reimbursed expenses qualify for tax deduction. Business-related expenses such as travel and transportation, meals, accommodation and the like incurred by the employees are the ones that you usually reimburse. The employees are required to confirm the expenses within 60 days from the time they were incurred. Also, they are required to refund the excess amount that they have received in advance if any, within 120 days of incurring the business-related expense.
· Software. Section 179 provides you an opportunity to take a substantial tax break, which pertains to deductions of business-related expenses on software. If your small business uses desktop software that has been bought off-the-shelf, you can deduct the full cost of software. However, such software should have been put to service between January 1, 2003 and December 31, 2014 to qualify for 100 percent cost deduction in the year it was bought. In the case, the software came with the computer and its price is not calculated separately, then such software is considered to be the part of the hardware. The cost of the hardware should be depreciated over the period of five years. Some small business use cloud-based services instead of desktop software to handle their business transactions. In such scenarios, tax deduction for the monthly fee charged by the service provider can be availed. The IRS does not stipulate a dollar limit for the monthly fee of subscription to cloud-based services.
· Bad Debts. If someone dupes you in the course of your business, the bad debts can be deducted from the taxable income depending on the type of your business. Small business dealing in goods can avail deduction of bad debts to the extent of the cost of goods sold for which they never received the payment. However, the tables turn when it comes to small businesses rendering services. They cannot claim the deduction for bad debts for the services they provided but never got paid for.
· Interest on Borrowed Capital. If you have borrowed a loan to finance your business operations, the interest as well as the carrying expenses is fully deductible. Sometimes, the small business owners take personal loans and use the money to finance their business activities. Even in such scenarios, the interest and carrying expenses are completely deductible. Make sure you take advantage of each and every tax deduction that you are legitimately eligible for this year. Keep good records to support your claims.
1040Return.com provides tax software resources, information, tools, and more. It has been designed to help the self-employed and small business owner. They have also conducted research to calculate the average net profit for all 318 industries, based off of average gross sales. This free information helps small business owners maintain accurate records and provides an idea of IRS expectations. They also provide audit protection insurance that helps if there is ever an audit. For more information on 1040Return.com visit the site at: www.1040Return.com.