Properly tracking and deducting your business expenses is vital. Some common expenses, for example, are salaries paid to employees, rent for office space, and utilities. However, there are several less common expenses you can take advantage of to reduce your taxes.
For example, did you know that special rules exist for deducting the full purchase price of some new depreciable assets (subject to certain income and purchase limits)? This is known as the Section 179 Expense (mainly geared toward small businesses). Also, were you aware that highly profitable businesses may be able to stock away additional retirement funds for key employees through cash balance and other carve out plans? In the constantly changing business world, legally reducing your taxes can provide just the competitive edge that you are looking for.
Common Business Deductions
When you’re starting a business it is important to take advantage of some of the more well-known tax deductions, including rent for office space, utilities, and wages paid to employees. Your business may also be eligible to deduct marketing expenses, accounting fees, legal expenses and the costs to start your business. Travel, vehicle expenses, and meals for your employees are also common expenses that you do not want to forget about.
Depreciation/Section 179 Expense
Depreciation and Section 179 Expense can often be the largest tax write off for many businesses. Although the concept is fairly common, the application of depreciation and Section 179 expenses can be confusing.
Depreciation is the systematic expensing of a large capital improvement or purchase over a period of time (most commonly as low as 3 years for some new technology and as high as 39 years for commercial real estate). The length of depreciation is tied to the useful life of the asset. Section 179 expenses is offered as a method to deduct up to $500,000 of your capital expenditures except for land, buildings, and certain improvements (it can often be used for machinery, trucks, or upgrading technology).
The Section 179 expense can only reduce your income to $0 (it cannot bring you to a loss, the remainder is generally carried forward), and is reduced dollar for dollar between $2,000,000 and $2,500,000 of purchases.
Commonly Missed Deductions
As businesses become more profitable they often have to become more creative with their legal tax deductions. First and foremost, highly profitable businesses are able to stash away a higher percentage of income in “cash balance retirement plans” for some of their highly compensated and key employees.
Also, while meals and entertainment for clients is usually only 50% deductible, meals for your employees that work over the weekend are generally 100% deductible. Another important deduction: small business owners might be able to write off part of their home expenses if they work out of their house.
Reducing your tax through the use of legal deductions is a main goal of every business. It is up to you and your accountant to properly reduce your tax burden. The right mix of well-known tax deductions such as rent and utilities paired with proper depreciation planning and more creative expenses can provide just the balance that is needed to retain more of your hard-earned money.
A word of caution: It is also important to make sure that you are not raising any red flags that could lead the government to audit your tax return. Audits can be lengthy, costly, and can easily lead to additional taxes, interested, and penalties. I look forward to providing proper advice for lowering your tax bill!
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