Granted, nobody loves the Internal Revenue Service (IRS), but the tax code provides a fair number of deductions for small-business owners.
Following are five not-to-be-missed tax deductions that can lower the annual tax bill for small-business owners.
1. Start-up Cost Deductions
You can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of business. The IRS allows small- and medium-sized businesses to write off or amortize market research, advertising, employee training, business-related travel, legal advising and a number of other costs.
2. Education Deductions
You can deduct education expenses related to your current business, trade or occupation. The education must pertain to maintaining or improving skills required in your present employment, be required by your employer, or be a legal requirement of your job. Transportation to and from classes may also be deductible. The cost of education that qualifies you for a new job isn’t deductible.
3. Vehicle Deductions
Auto deductions are clearly delineated under IRS rules and tend to be among the more scrutinized items, so accurate record keeping is critical. If you use your personal vehicle on the job, keep careful records of where you go and the nature of your business. The IRS stipulates that personal auto use cannot be written off as a business-related expense, so be sure to follow the guidelines in Publication 463.
There are two methods of claiming vehicle expenses:
- Actual Expense Method: You keep track of and deduct all of your actual business-related expenses.
- Standard Mileage Rate Method: You deduct the standard mileage rate for each mile driven, plus all business-related tolls and parking fees. In 2009, the standard mileage rate is 55 cents per business mile driven. The rate was 50.5 cents per mile for the first half of 2008 and 58.5 cents per mile for the second half of the year.
You can write off a newly purchased vehicle (even a used one) in one deduction or through depreciation. You can also receive up to $3,150 from the government if you have purchased a hybrid for your business since 2005. Check out Form 8910 for more details.
4. Equipment Deductions
You can take a deduction for new or used equipment that is newly-purchased and will be used at least half of the time for your business. Equipment includes computers, machines, furniture, cars and other movable items (but not property). You can opt to take the full, immediate deduction or you can write off portions of the equipment purchases over several years through depreciation.
5. Entertainment Deductions
You can deduct up to 50% of entertainment expenses that are not reimbursed for business gatherings. The entertainment must be within a “clear business setting” such as at a conference or meeting, or should immediately precede or follow a business meeting. If you are self-employed, the 50% deduction limit does not apply.