Small enterprise owners often spend a lot of money on taxes. However, the federal law does allow you to cut certain costs from your income so that you are only taxed on the net amount. Failing to utilize tax exemptions for small business owners efficiently will really hike your tax bills. Thus you need to make sure you do not overlook any write-offs you are entitled to claim.

First, we need to get the difference between tax deductions and tax credits. This is one of the more misunderstood topics when it comes to small business taxes.

Tax Deductions

Deductions emanate from your taxable income. Therefore, the value of the deductions rises as your taxable income rises. For instance, if you are in the 15% bracket, you shall cut 15 cents off your tax for every dollar that you deduct. Similarly, being in the 35% bracket means that your tax is cut by 35 cents for every dollar that you deduct.

However, tax credits are more valuable to tax payers in lower brackets. For example, being in the 35% bracket will see you make $2,857 in deductions for you to get $1,000 credit. The 15% bracket will see you need $6,667 in deductions for you to get $1,000 credit. The key lies in knowing what to claim. Here is a list of tax exemptions for small business owners that you need to know about:

1. Home Office Deduction

There are some specifications you need to cover to claim the home office on your tax. The IRS insists that the office must be a space that is devoted only to your business and nothing else entirely.

Additionally, the deduction does not necessitate a full room. Instead, the office can be a section of a room. So you need to measure your operating area and divide this by the square footage of your house.

The percentage shall be the fraction of your house-related business expenses, i.e., the mortgage, rent, electricity, insurance, etc. – that you can claim. A more straightforward method of claiming your home office tax deduction is considering both the simplified and regular means of writing off your house office.

Tax experts usually instruct that the chances of getting audited do not necessarily become greater when you claim a home office deduction. The critical point is in using the phrase ‘home office’ in the same way as the IRS. Thus the space should only be used for business-related purposes and not for anything else.

2. Furniture Deduction

home office in black and white with man working at computer in a room with creative wall posters

Office furniture deductions offer you two options:

  • Cut a hundred percent of the cost during the year of purchase.
  • Deduct portions of the expense over a period of seven years – which is known as depreciation.

If you decide to deduct the whole cost in a single year, ensure that you use the Section 179 deduction.

If you instead choose to depreciate the filing cabinets and desks, you cannot just split the cost into equal parts over the depreciation period. Instead, you have to use an IRS chart for making separate calculations each year.

To make the best out of these tax exemptions for small business owners, anticipate the periods that your small business shall need the deductions the most. Both choices are reported on IRS Form 4562.

Other equipment such as copiers, computers, scanners, and fax machines are tax deductible. Similarly, you can choose to take the 100% deductible upfront or have them depreciate over time.

3. Deduct Health Care Premiums Deduction

If your health plan is just yours (individual) and you usually pay the premiums out of your pocket without subsidies or tax breaks, you are eligible to claim these premiums as an income tax deduction.

To claim the deductions, you have to be a sole proprietor, a partnership or LLC or an S corporation shareholder that owns over 2% worth of company stock. For instance, let us presume you are a sole proprietor and your personal/business income is $60,000. In this case, your federal and state tax requirements are around 30%. If you spend $10,000 on health insurance for yourself or your spouse, you may deduct these to make your gross income $50,000 instead of $60000. This one move will save you $3,000 in income tax payments.

As a small company owner that meets the above criteria, you can ask for a $10,000 income tax break. However, you will not get a self-employment tax break. This shall remain $60,000 taxable income (small businesses have to pay both).

Nonetheless, if your significant other is an employee in your organization, you can get breaks for both. Since they are both your spouse and employee, you shall cut the $10,000 in payments from both your self-employment and business income tax if you file jointly. In this case, you will have saved $3,000 on income tax and $1,530 in self-employment tax.

4. Advertisement and Promotion Cost Deduction

Another type of tax exemptions for small business owners is for costs associated with getting the word out about your business. Additionally, they are not limited to obvious advertising channels such as newspapers, TV, and radio or Yellow pages, but also in the subtle promotions. These can be costs of printing business cards and other paraphernalia.

Moreover, you are not consigned to the final cost deductible. You may also deduct costs of creating slogans, logos, and graphics. Your business website costs are also deductible. Be creative when looking for tax exemptions for small business owners. Even the costs of creating workshops and hosting seminars for luring in clients are deductible.

5. Travel Deduction

businessman with luggage in airport going to board a plane

For business trips, you can deduct many costs including that of plane fare, car operation costs, lodging, taxis, cleaning clothes, meals, telephone calls, shipping business materials, and tips. What about the case where you mix pleasure and business? It is fine as long as the core purpose of the trip is business. However, if your family tags along, only your expenses are deducted.

Final Word

Use these five tips on tax exemptions for small business owners to save some cash on your taxes this year. Understandably, tax benefits are quite complicated, thus, check in with your tax professional for more insight.

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