Top Tax Deductions for Your Small Business
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8. New Equipment
Some small businesses can write off the full cost of some assets in the year they buy them, rather than capitalizing them -- deducting their cost over a number of years. (See Nolo's article Current vs. Capital Expenses for information on expenses that must be capitalized.) Under Section 179 of the Internal Revenue Code, you can currently deduct up to an annual threshold amount the cost of equipment and certain business assets you purchase and place in service that year. Some assets don't qualify for the Section 179 deduction, including real estate, inventory bought for resale, and property bought from a close relative.
The Section 179 annual limit was set permanently at $500,000 effective January 1, 2015. The limit has varied greatly over the years-- from as low as $10,000 when Section 179 was first enacted to its current $500,000. In addition to the annual limit, there is a phase-out on how much property can be deducted under Section 179 that starts when a business purchases more than $2 million in business property in a year. Once this annual investment limit is reached, the amount you can deduct under Section 179 is reduced dollar for dollar by the amount your purchases exceed the $2 million limit. For more information, see Section 179: What Every Business Owner Needs to Know About This Depreciation Deduction.
There is also a first-year bonus depreciation deduction in effect through the end of 2019. This special deduction allows taxpayers to depreciate an additional percentage of the adjusted basis of qualified new property during the first year the property is placed in service. The bonus depreciation amount is 50% for 2015 through 2017, 40% for 2018, and 30% for 2019. It will not be available in 2020 or later. This deduction can be taken in addition to the Section 179 deduction and offers tremendous tax savings.
9. Moving Expenses
If you move because of your business or job, you may be able to deduct certain moving costs that would otherwise be non-deductible personal living expenses. To qualify, you must have moved in connection with your business (or job, if you're an employee of your own corporation or someone else's business). The new workplace must be at least 50 miles farther from your old home than your old workplace was. (Technically, moving expenses aren't business expenses; there's a special place to list them on your Form 1040 tax return.)
As a general rule, software bought for business use must be depreciated over a 36-month period, but there are some important exceptions:
- When software comes with a computer, and its cost is not separately stated, it's treated as part of the hardware and is depreciated over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year if the total cost is within the Section 179 annual deduction amount (see Section 179 discussion above). See IRS Publication 946, How to Depreciate Property.
- Computer software placed in service from January 1, 2003 through December 31, 2014 is eligible for a Section 179 deduction, which means that 100% of the cost of software can be deducted in the year purchased.
11. Charitable Contributions
If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.
If you've got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. However, if the equipment has been fully depreciated (written off), you can't claim a deduction.
Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax:
- Sales tax on items you buy for your business's day-to-day operations is deductible as part of the cost of the items; it's not deducted separately. However, tax on a big business asset, such as a car, must be added to the car's cost basis; it isn't deductible entirely in the year the car was bought.
- Excise and fuel taxes are separately deductible expenses.
- If your business pays employment taxes, the employer's share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn't a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement -- for example, to build a sidewalk -- it isn't immediately deductible; instead, it is deducted over a period of years.
13. Education Expenses
You can deduct education expenses if they are related to your current business, trade, or occupation. The expense must be to maintain or improve skills required in your present employment. (The cost of education that qualifies you for a new job isn't deductible.)
14. Advertising and Promotion
The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort.
Easily Overlooked Business Expenses
Here are some additional routine deductions that many business owners miss. Keep your eye out for them.
- audiotapes and videotapes related to business skills
- bank service charges
- business association dues
- business gifts
- business-related magazines and books
- casual labor and tips
- casualty and theft losses
- coffee and beverage service
- consultant fees
- credit bureau fees
- office supplies
- online computer services related to business
- parking and meters
- petty cash funds
- promotion and publicity
- seminars and trade shows
- taxi and bus fare
- telephone calls away from the business
Note: Just because you didn't get a receipt doesn't mean you can't deduct the expense, so keep track of those small items.
For More Information
To learn all the ins and outs of the tax code and really start saving on your business taxes, get Deduct It! Lower Your Small Business Taxes, by Stephen Fishman (Nolo).
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