Many people today are enjoying the benefits of being their own boss and running their own company. According to the U.S. Census, there are currently more than 5 million companies with fewer than 20 people actively operating in this country. Whether you freelance or you have created a company that employs others, you can take advantage of a variety of tax deductions on your business income.
Owners of large corporations have accountants and tax experts working for them, but many small-business owners and freelancers cannot afford that added expense. If you complete your tax returns on your own each year, make sure that you are aware of the tax deductions you can use to save. Some of the most common business deductions are listed below.
According to Entrepreneur Magazine, approximately 52 percent of all businesses in America are operated out of the business owners’ homes. The home office deduction, therefore, is one that may be useful to many.
Of all available business-related tax deductions, this one is the most complicated. You can deduct a portion of your heating, cooling, home insurance, and rent or mortgage costs from your taxable income, based on the percentage of your home that is used for business purposes only. Recent changes in the tax code have simplified the calculation of this deduction by allowing business owners to opt to deduct $5 per square foot of office space, up to 300 square feet.
To be eligible for this deduction, you must have a room that is used for work-purposes only. If your computer is set up in a guest bedroom, for example, you may not deduct the entire room as a home office.
If the portion of your home that is used for your business is very small, many tax advisors will recommend that you forego this deduction. This is because the amount of money you will save will be minimal and not worth the complications that may arise because of an audit. If you are uncertain whether this business deduction is right for you, speak with a lawyer or tax advisor before making a decision.
Whether or not you are deducting a home office from your taxes, you may deduct the cost of office supplies that you use in the course of your business. This includes everything from pens and pencils to toner cartridges for your printer. Be sure to save all your receipts. Many people find it very helpful to have a credit card that is used strictly for business purposes.
Some examples of things you may deduct include:
- Writing materials including pens, pencils, markers and highlighters
- Paper, notebooks, file folders, binders and notebooks
- Business cards, stationery and promotional items with your business name on them
- Office furniture, file cabinets and desktop telephones
- Computers, flash-drives, recordable CDs and software
- Envelopes, postage and packing supplies
Internet Connection and Phone
If you rely on email and internet use as a part of your daily business operations, you may deduct the cost of your internet service from your taxable business income. The same holds true for your land-line or cell phone service if your phone number is your business line. This includes cell phones that have a data plan.
Unlike a home office, it is not necessary that you use your internet or phone service for business purposes only. This is because your service most likely comes at a flat fee, regardless of usage.
Health Insurance Premiums
The Affordable Healthcare Act requires business owners who have more than 50 full-time employees to provide them with affordable healthcare options. Policies may be purchased by business owner or individuals at lower group rates through the healthcare exchanges set up by each state. For information about this is being offered by the SBA through scheduled webinars.
Whether you are providing health insurance to your employees or you are simply purchasing a policy on your own, you may be able to deduct 100 percent of the incurred expenses from your business income. However, there are some caveats:
- If your healthcare expenses exceed your business’s net profits, you may only deduct an amount equal to net profit.
- If you are eligible for healthcare coverage through your spouse, you may not deduct the cost of purchasing your own coverage.
If your spouse works for you, you may deduct 100 percent of the cost of insuring him or her as well as your children, but your spouse must be an actual, documented employee of your company and you must offer the same health insurance coverage plans to all of your employees.
People who drive frequently in the course of business are most likely to be aware of this deduction, but those who drive only on occasion often overlook it. If you make trips for supplies or to make deliveries, or if you drive somewhere to meet with a current or prospective client, you are entitled to deduct the mileage you have accrued while doing so.
If you plan to take this deduction, it is imperative that you keep extremely good records of your business-related driving. Record the date, your destination, the exact number of miles driven, and the purpose of your trip in a log or journal. When compiling your taxes, add up the number of miles driven. For tax purposes, you are entitled to deduct 56.5 cents per mile driven. This deduction includes fuel costs so you may not deduct the cost of gasoline as well.
Business Travel Expenses
If you take a business trip, such as to attend a conference or to meet with an important client who lives out of town, you may deduct the associated costs from your business income. These costs include:
- Mileage driven
- Airfare, train or other transportation costs
- Hotel charges
- Entertainment costs, if entertaining a client
Be aware that travel and hotel costs are 100 percent tax-deductible, but meals and entertainment costs are only 50 percent deductible. Also, you are permitted to deduct the cost of a gift to a client or employee but only up to $25 per person.