Many small business owners pay too much tax because they neglect to take deductions they are entitled to, or don't know about certain breaks that can help lower their tax bill.
The way to keep yourself from overlooking key deductions is effective tax planning and record keeping. Many small business owners ignore tax planning, and don't think about their taxes until they are scheduled to meet with their accountant. Tax planning is an ongoing process, and good tax advice is a very valuable commodity. You should review your income and expenses monthly, and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.
Commonly overlooked deductions for small business owners are:
Everyday cash expenditures~ If you are like many small business owners, you regularly spend small amounts of cash on things like pens, taxis, coffee with clients, groceries for your office, etc. While these don't seem like large outlays at the time, over the course of a year, they add up. But here is the problem. These cash payments are difficult to document, so you often end up not taking all the deductions to which you are entitled. The solution? Whenever possible, pay for these items by credit card or check. This way, you'll have a record of every payment. There are lots of places where you can easily shift from cash. You can set up accounts with businesses you frequent, such as stationary, office supply stores, delivery services, cleaning services, photocopy shops, etc. You can get a check writing card from your grocery store and use a business check to pay for office food and sundries. you can even buy stamps over the phone and pay with your business credit card. Another way to improve your cash expense record keeping is to reimburse yourself by check. Every week or two, tally your cash receipts and write yourself a business check for the amount you spent. Attach the cancelled check to these receipts with a note at the top, breaking down how much cash you spent in each category. This will help you tally your expenses at the end of the year, and will make it easier for you to take all the deductions you are due.
Industry specific expenses~ The Internal Revenue Code allows you to deduct all ordinary and necessary expenses of operating your business. This can be a broad definition, so it pays to know what's accepted and appropriate for companies in your industry. SOme of these may seem obvious, such as trade association membership, professional subscriptions and publications, and industry trade shows are all often deductible. Chances are there are other things that you can deduct that you are not aware of. For example, if you are in public relations, you can most likely deduct the cost of just about every newspaper or magazine you get, not just professional publications, because understanding the media is critical to your business success. It's a good idea to discuss these deductions with your CPA as part of your regular tax planning session, which is why it's important to have a tax advisor who understands the unique aspects of your industry. Ask them to help you recognize write-offs that are acceptable for your type of business, or identify changes in the tax code that are relevant to you.
Your Retirement Plan~ The government has a number of retirement plan options in place for small business owners. SEPs, Keoughs, and SIMPLE plans all offer significant tax advantages. Depending on the plan and your earnings, you can shield as much as $30,000 of your income. It pays to take advantage of these savings incentives. It is the only area where you can make contributions to lower your taxes after your fiscal year ends. In general, few small business owners fully fund their retirement plans, and this can be a mistake. Many experts contend that retirement plans are one of the best tax breaks available to small business owners. Not only do they give you a deduction this year, but they also allow you to compound the contribution tax free. Think of this as a double tax benefit.
Half of your self-employment tax~ If you have self-employment income, you must figure and pay self-employment tax. This tax covers your FICA contributions to Social Security and Medicare. You do this because you don't have wages on which to figure your FICA payments. Your self-employment tax covers both the employer's and employee's share of FICA. The rate is 15.3% (12.4% for Social Security on the first $65,400, and 2.9% for Medicare on all earnings). The good news is that you get to write off half of your self-employment tax (the employer's share) as an adjustment to your gross income. You do this on line 26 of your IRS Form 1040.
Your Health Insurance Payments~ If you are self employed, you can immediately deduct 40% of your health insurance premiums to cover you, your spouse, and your dependents. You do so on line 27 of your 1040. Be sure to take the remaining 60% and add it to your itemized medical expenses. It may be enough to push you over the limit (7.5% of gross income), and make your other medical expenses, including dental care, eye care, contact lenses, prescriptions, etc., tax deductible.
