It’s the three letters that can send shivers down the spine of any small business owner—IRS. Don’t mess with them, and the hope is that they won’t mess with you.
It’s a good rule of thumb, but unfortunately, because of this motto, many owners miss out on plenty of legal deductions they can claim for their small business. Oftentimes, even the most savvy entrepreneurs overlook all their options.
Before you do your taxes, check out this list of deductions you can claim to minimize the federal toll on your small business and maximize the net profit of your company. Some of the options may surprise you.
1. Home office: The key to avoiding an audit from the IRS when it comes to claiming a home office deduction is knowing what exactly they define as a home office. According to tax specialists, this must be a space that is solely devoted to office work, not doubling as a family-computer room or guest bedroom. The home office deduction can also be applied to a part of a room. Just measure the square footage of your work area and divide it by the square footage of your home. That percentage is what is deductible for business expenses. Just make sure the home office falls under the specific guidelines defined by the IRS.
2. Office supplies: Keep all the receipts you receive for office supplies—paper, printer ink, staplers, pens, post-it notes, you name it. The stack of receipts at the end of the year may be a hassle, but can pay off by offsetting your taxable business income.
3. Furniture: There are a couple different options when it comes to deductions for office furniture—100% deduction on the year of purchase or a depreciative deduction over 7 years—but either way, be sure to take advantage of this one. Furniture really adds up, and using it for deductions can really bring down taxable income.
4. Other equipment: This covers all remaining office equipment not specified in the supplies or furniture deductions—laptops, copiers, fax machines, etc.—and work the same way as furniture deductions with depreciative or 100% deductions.
5. Software and subscriptions: Whether it’s a computer program needed for the operation of your business, or a subscription to a magazine of your industry, you can claim these deductions on your taxes. As of recently, business owners can take the total cost of the software or subscription as a full deduction within the year they were purchased, rather than depreciate the cost.
6. Mileage: If you drive for your work, the IRS gives you money back for business-related driving expenses. The catch? They need documentation. So keep a notebook in your car to record all dates, mileage, tolls, parking costs, repairs, and reasons for the trip. But remember, only claim a deduction for business-related travel. Taking your kids to school in the minivan doesn’t count.
7. Travel, meal, entertainment, and gifts: In addition to mileage, you can receive deductions for airfare, hotels, restaurants, car rentals, and other travel expenses from being away from home for business. Plus, except for restaurants, all of these items are 100% deductible. Eating out is only covered by 50%. So eat cheap, and stay in a nice hotel—or just get room service. Gifts directly for clients are also 100% deductible. Again, keep those receipts!
8. Insurance premiums: If you are paying your own health insurance premium, and are not eligible for any other health care coverage (from your spouse for example), then the good news is that this is also 100% deductible. There are limits to this claim, such as the deduction cannot out-value the net profit of your business, so review the IRS guidelines to see if you are entitled to this deduction.
9. Retirement contributions: Business owners who are self-employed and saving for their own retirement shouldn’t forget to claim a deduction for their contribution.
10. Social security: Here comes the bad news—self-employed entrepreneurs are considered both employee and employer, and thus have to pay double for social security. Luckily, half of the contribution can be deducted on your 1040, so it all works out in the end.
11. Telephone charges: When your phone bill comes in, record the business-related calls and total up the cost. Add up the 12 bills at the end of the year and claim the 100% deduction. It’s that easy, and can be a huge saver.
12. Child labor: We aren’t talking sweat shops here. But employing your children can give you a nice tax break. The IRS does not charge Social Security tax for business owners that hire their children while they’re under 18 years old, and you can deduct their salary as a business expense. The catch is that you must be the sole proprietor of the business, or be in a partnership with your spouse as the only other proprietor. This is a nice way to save a little money and teach your child how to save at the same time.
These are just a few of the ways you can keep more of your hard-earned money away from the clutches of the IRS and in your pocket.
Small business owners don’t have to live in constant fear of being audited. Know your options, including states with the best tax climate, and take advantage of all the opportunities you have—not a bad rule to follow for business and life.