When you run a small business, it can be difficult to know when you're leaving money on the table. Many startups and small companies walk the razor-thin line between profitability and bankruptcy — meaning there's often a tiny margin of error when it comes to taking advantage of financial opportunities.
For this reason, it can be incredibly helpful for owners to capitalize on small business tax deductions. The money saved from these deductions could mean the difference between achieving or failing to meet your budget goals, which could also have far-reaching effects on the future of your company. Learn about four small business tax deductions, which could help you reach your business goals.
Deduct Interest Payments
Almost every small business needs an occasional loan to buy new inventory, move to a larger location or grow its team. If you take out a loan for your business, the interest you pay is tax-deductible, according to the Internal Revenue Service (IRS). To deduct the interest, you have to be legally liable for the debt, intend to pay it off and have a "true debtor-creditor relationship" with your lender.
If you're only partially liable for the debt, you can only deduct your portion of the interest. Although the interest is deductible on your taxes, it may not be worthwhile to take out loans when you could pay cash. Why? You may end up paying more in interest than you would save on your taxes.
Deduct Bad Debts
Almost every small business owner has dealt with a customer who just won't pay — no matter how many reminders and past-due notices you send. If you have outstanding invoices or previously gave a loan to a client, you can deduct the amount due if it becomes clear the client won't pay up. However, you must attempt to collect the income before writing it off as bad debt. You must document this attempt through letters, invoices and proof of phone calls.
You can also only deduct this amount if you already included it as income in a previous tax filing (meaning you already paid taxes on it). The debt should be deducted in the year you determined the vendor or client wouldn't pay, but the IRS also gives you three years to amend a tax return to report a bad debt.
Deduct Startup Costs
New small business owners can deduct up to $5,000 in startup costs, according to the Internal Revenue Service. These costs include employee wages, market research analysis and staff training. Owners can also deduct an additional $5,000 for organizational costs or expenses incurred when setting up the business as a partnership or corporation. Organizational costs can include legal, filing and accounting fees.
This deduction is only available if your total startup costs are $50,000 or less, however. If you spend between $50,000 and $55,000 starting your business, your deduction will be decreased by the dollar amount exceeding $50,000. If your business cost $54,000 to set up, for instance, you can only deduct $1,000 in startup costs. Spending more than $55,000 on business expenses eliminates the deduction.
Deduct Qualified Business Income
The 2017 federal tax overhaul gives a big boost to many small business owners. It includes a drastic cut to the corporate tax rate (from 35 to 21 percent), as well as a 20 percent tax deduction for pass-through entities like sole proprietors and S-corporations.
The deduction begins to phase out with individuals earning more than $157,500, or married couples earning more than $315,000. Some business owners, such as doctors and lawyers, would be completely ineligible once they hit the income limit, while others would be allowed to take a partial deduction.
Taking Advantage of Small Business Tax Deductions
The list of business-related deductions is long and complicated. When you're running a business, you often don't have time to keep up with tax law changes. This is why having a dedicated accountant, or a certified public accountant (CPA) who specializes in business taxes, can be so helpful. If you're currently using an accountant who primarily works with individuals and families, consider switching to someone with a small business focus. They'll be more aware of what you can deduct and how you could organize your taxes correctly.
To take these deductions, it's important to track your expenses vigilantly. Keep all of your receipts, contracts and anything else you'll need to prove to the IRS that you qualify for the relevant deduction. If you want to deduct bad debt, you'll also need to prove you claimed the income on your taxes and that the client doesn't intend to pay you. Keeping good records will make it easier for both you and your accountant in the long run.
Tax time is always confusing, especially for small business owners. But if you take the time to educate yourself about these deductions, you could save money, which could help you invest in the future of your business.
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