If one of the items up for bid on The Price Is Right was starting a new small business, you’d have to give Drew Carey a pretty hefty bid on such a prize to win it.
Diving headfirst into business ownership can be a very costly venture. The good news is that there are lots of ways to reduce your IRS tax bill each year, thanks to several tax deductions for small business owners. Here are a few write-offs that many entrepreneurs overlook and often fail to claim on their tax returns:
1. Vehicle DeductionsA valuable tax deduction for which most self-employed independent contractors and small business owners qualify revolves around vehicle costs. In order to claim this write-off on your tax return, you must use your vehicle for business purposes. IRS guidelines state that you must drive from your home office or a separate employment location to a different area in order to conduct your trade.
You can select from two different deduction options. The first is to document how many miles you drive for business reasons and write off this amount. The standard mileage rate for tax year 2015 is 57.5 cents per mile. (The 2014 rate is 56 cents per mile if you still need to file your 2014 taxes.) This means you can claim this rate as a deduction for every mile you drive to get from one place to another to conduct business activities. The other option is to claim actual vehicle expenses. This write-off often includes all expenditures you incur for gas, tolls, maintenance, and vehicle insurance when determining what you spend on business trips. Explore both deduction options to calculate which method will reduce your IRS tax bill the most.
2. Home Office DeductionIf you conduct any aspect of your small business in your home, you are likely eligible to claim home office expenses as a write-off. In simple terms, you can deduct the percentage of the costs you incur for maintaining a home office. Eligible expenses include mortgage interest, homeowners’ insurance, rent, electricity, water, repairs, or Internet access. All of these costs must be directly tied to the activities in your business for them to qualify. You should also designate a specific area or room in your residence where you do business, and these costs should be associated with this area. In 2013, the IRS introduced a new alternative to simplify the process of deducting home office expenses. This flat-rate deduction option allows self-employed, home-based professionals to claim $5 per square foot of home office for up to 300 square feet of office space. However, there is a maximum deduction limit of $1,500.
3. Deductions on Medical CareFormally-crowned small business owners and those who work as sole proprietors or in partnerships can typically deduct medical costs on their returns when filing with Uncle Sam. These include out-of-pocket medical costs and health insurance premiums. If you currently have or obtain a self-insured medical reimbursement plan, you may have the ability to deduct up to 100% of all out-of-pocket medical care costs you incur. Most medical expenses incurred by your spouse or your dependents qualify for this write-off as well.
4. Meals & Entertainment DeductionsWe all love to eat and be entertained. So do you really think the IRS would let you deduct your meals and entertainment activities? The answer is yes if they are directly related to your business – and if they are classified as “ordinary and necessary expenses,” according to IRS terminology. An example is if you have a business meeting with your business partner or a client at a local seafood restaurant. After enjoying your clam chowder and shrimp étouffée, you can deduct 50% of the bill as a business expense. Just make sure that you keep all relevant receipts. Write down the names of all parties involved in a meal or those who attend an entertainment activity, and make a note of what type of business was either discussed or performed.
5. Charitable Contribution deductionsWhile it’s not specifically a business-related deduction, remember that non-cash contributions you make to qualifying charities should result in a tax-saving write-off. In general, the value of donated items like clothing, furniture, and household goods is 100% tax deductible. Some charities accept used cars, boats, motorcycles, and other vehicles if they meet certain quality standards. These donations can also be deducted. Save any receipts or handwritten contribution acknowledgements you receive from a charity. When you file your taxes and claim donations as a write-off, the IRS will need to see some type of proof of your donation.
As you plan and prepare for this tax season, take advantage of these deductions for your small business. If you have any questions, let us know in the comments below.
Brendon Pack is a partner at 1-800Accountant, the nation's leading accounting and consulting firm specializing in small businesses and startups. Through its unique suite of virtual and mobile services, the firm assists clients with tax planning and preparation, bookkeeping, payroll, and audit protection.