Tax Deductions for Business Owners: “The #1 Tax Shelter for the Little Guy”

Doesn’t matter whether you work it part-time or full-time, owning your own business has been called the “#1 tax shelter for the little guy”.

Why? Because the tax laws allow you to take advantage of countless deductions (or tax write offs) that aren’t available to those who only work as W-2 employees.

For example:

  • Business owners can deduct a portion of their housing costs, but most employees cannot.
  • Business owners can deduct a portion of their auto, meals and entertainment expense, but most employees cannot.
  • Business owners can deduct a portion of their cell phone expense, but most employees cannot.

In effect, it’s as if Uncle Sam is sharing with you part of the burden of paying these expenses.

Note: I’m assuming here that you’re operating a legitimate business; one that you’re putting significant time and effort into (say, 15 hours per week or more); one where your sincere goal is to build a profitable business, not take a hobby and call it a “business” on your tax return  just so that you can generate phony business deductions and reduce your income tax liability.

Here’s the tricky part. Some expenses are deductible this year, but other expenses must be spread out over several years. Here’s a couple examples:

  1. You might be able to write off 100% of the cost of new computers and furniture this year (per IRS Code Section 179).  But if your business is new and developing, you may not a lot of income in the first year or two, so a wise strategy might be to defer some of your deductible expense to future years (something accountants call “depreciation”).
  2. You can a deduct a portion of your “start up costs”  this year if it’s your first year in the business, but above a certain level you’ll have to spread the rest of those costs over the next several years tax returns (something accountants call “amortization”)

That being said…don’t overlook these expenses when you file your tax return:

• Accounting and Legal Fees
• Advertising / Website Costs
• Association Dues
• Auto and Truck Expense
• Bank Charges
• Computer Expense
• Dues and Subscriptions
• Education and Training
• Equipment and Furniture
• Gifts
• Home Office Expense
• Insurance
• Licenses and Permits
• Meals and Entertainment
• Postage and Delivery
• Printing
• Rent and Office/Admin Fees
• Repairs and Maintenance
• Retirement Savings
• Start Up Costs
• Supplies and Materials
• Taxes (Property Tax, Payroll Tax, etc)
• Telephone
• Travel and Entertainment

Bottom Line, it’s good to know the (tax) code when it comes to record-keeping and taxes in your business.  IRS Publication 463 “Travel, Entertainment, Gift and Car Expenses” can help you with further details on the rules in some of these areas.

ANCHOR ON THIS:  Consider hiring a tax professional to prepare your tax return. It’s normal to save far more money in taxes than you spend on accounting fees.  Tax pros know the rules, prepare hundreds of returns each year, can lower your tax bill, reduce your audit-risk, and help you avoid penalties and late-filing fees.

Posted in Small Business.

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