30 Essential Tax Tips for Small-Business Owners
Freelancers, sole proprietors, and small-business owners wear many hats. Some even choose to add accountant duties to the mix. It can be hard work, but familiarity with tax rules can help guide business owners' decisions throughout the year and lead to significant savings come tax-filing season. Here are 30 tax tips that could benefit new and seasoned entrepreneurs.
Related: 50 Fun Facts to Lighten Up Tax Time
For small businesses, the small things can add up. Be sure to have a system in place to collect and organize receipts, no matter the size. Business owners may be surprised how small expenses add up to big tax savings.
Expenditures that directly help a business make money during the year count as business expenses and can be deducted that year. By contrast, capital expenditures, which typically benefit a business for several years, depreciate over time. For example, a new vehicle is typically a capital expenditure, while the gasoline for the vehicle is a business expense.
Under Section 179 of the Internal Revenue Code, business owners can write off the full amount of qualifying purchases, such as vehicles and computer software, in one year instead of depreciating them over several years. The annual value of this special deduction has varied, but it's $500,000 for 2016.
Sole proprietors and self-employed workers can deduct the cost of health insurance premiums for themselves and their families. The deducted amount cannot exceed the total earnings of the business. Note that anyone with access to an employer-subsidized health plan, even through a spouse, cannot take this deduction.
Business owners and contractors with a high-deductible health plan may be able to put money into a health savings account. The money in the HSA is tax-deferred, meaning the taxpayer gets a deduction for the amount contributed, and if used to pay for medical expenses, it's tax-free. In 2017, the maximum annual contribution limit is $3,400 for individuals and $6,750 for families (those 55 or older can contribute an additional $1,000 each year).
Small businesses with fewer than 25 full-time employees and average annual wages below $52,000 per employee can deduct up to half the premiums paid for employee health care. The business also must pay at least half of employee health insurance premiums and purchase health insurance through the Small Business Health Options Program, known as the SHOP Marketplace, to be eligible.
Self-employed business owners can reduce their income for the year by contributing to SEP-IRA, SIMPLE IRA, or solo 401(k) retirement accounts. The accounts let business owners put away thousands of dollars tax-free each year by making contributions as both the employer and employee.
Depending on how their businesses are structured, owners may be able to avoid paying FICA taxes on some of their income. If the business is an S corporation, which passes profits and losses on to shareholders, the owner must take a competitive market-rate salary that has FICA taxes taken out. Profits beyond that may be exempt from FICA taxes.
Sole proprietors can hire their children. Everyone wins: The child gets a job, and the parent does not have to pay FICA taxes as long as the child is younger than 18. Federal unemployment taxes don't need to be paid for children under 21. Children may need to file a tax return if their earned income is more than the standard deduction, $6,350 in 2017.
Business owners can also hire grandchildren and keep money in the family while lowering their tax bill. Not sure what your grandkids can do? One idea is to have them take photos for ads and social media profiles.
Starting a business can be expensive. During the first year there are expenses for basic supplies, equipment, meetings with potential investors, incorporation, advertising, utilities, and more. New business owners can deduct up to $5,000 for business costs and $5,000 for organizational costs. If costs exceed profits the first year, the remaining portion can carry over to the following years. However, these write-offs taper off once startup costs exceed $50,000.
Business owners studying a subject relevant to their business can write off the cost of books, classes, and professional publications. The subject does not need to be related directly to the services the business provides. For example, classes on tax preparation or management techniques could make the grade.
Whether the goal is continuing education or networking, professional organization fees are legitimate business expenses. Organizations could include a chamber of commerce, real estate board, and trade or professional association.
The small-business owner's favorite deduction can be complicated. Read the rules and consider checking with a professional before writing off a home office. Internal Revenue Service agents have been known to make house calls to see if office space is being used for other purposes.
If you take the home office deduction, a portion of the utility bill, including internet access, is deductible. Utilities at conventional offices are also deductible as business expenses.
Business owners can deduct the cost of using their vehicle for business reasons in two ways. They can deduct the actual costs, including depreciation (there are calculators for this), of using the vehicle for business. Or, they can claim a standard mileage rate -- 53.5 cents per business mile in 2017. However, they must keep a detailed log when claiming the mileage tax deduction. Parking and registration fees, tolls, and taxes may also be deductible.
Unfortunately, driving back and forth to work as part of a normal commute is not deductible. Going from a main job to a second job could be deductible at the standard business mileage rate. In addition, driving for business-related medical reasons, moving, donating items, or volunteer work are deductible expenses. The standard mileage rates vary: 17 cents a mile for medical and moving and 14 cents a mile for charitable causes for 2017.
Business expenses related to travel can be deducted. Keep receipts for everything: hotels, cabs, etc. Be careful combining a business trip with a vacation, since that's a potential red flag to the IRS.
Even when traveling for work, business owners can deduct only half the cost of meals. However, they can opt to deduct half the government's per diem rate for meals and incidentals instead of the actual amount. This means a deduction as high as $37 a day, even when spending less than that. In either case, hang on to receipts.
For TV personalities, bodybuilders, and other professionals whose appearance is directly related to their livelihood, grooming essentials such as body oil and makeup may be tax-deductible business expenses.
Many tax rules depend on how a business is structured and how its contracts are written. Speak with a tax professional or an attorney before implementing any complex tax sheltering strategies.