Starting a business isn’t always easy. Getting your brand off the ground and working out the logistics is challenging enough, but taxes are often the real barrier to success, not to mention a constant source of stress. In fact, surveys show small businesses consistently rank taxes as one of their biggest problems.
It’s easy to see why. Small to medium sized businesses often struggle to make a profit after taking operational costs like payroll into account. High taxes and a complex system make it even harder to survive.
1. The Startup Deduction
Just starting out? You’ve probably invested a good chunk of money into your business, which may make taxes an even larger burden than usual. Fortunately, if you’re in your first year of operations, you can deduct up to $5,000 of your startup expenses (though certain limitations apply if you spend more than $50,000 on your startup in the first year).
2. Don’t Forget the Carryover
Some tax deductions have an annual cap – charitable donations, capital loss, and business deductions all have limits. In many cases, if the amount you want to deduct exceeds the cap, you can apply it to the next year. For example, if you had $3,500 in capital losses in 2014, you could claim $3,000 that year and carry the $500 to the 2015 tax year.
3. Deductions for Meals and Entertainment
Most people think of business expenses as office supplies and other obvious costs associated with the daily workings of their businesses. However, you can also deduct meals and entertainment if they’re related to businesses. If you order food for a meeting with clients or an interview with candidates for an open position it can also be deducted from your taxes (usually at a rate of 50%). Just make sure to keep all your receipts.
4. Deductions for your Car and Cell Phone
Businesses will often reimburse employees for travel expenses like gas, rental cars, and even provide them with work phones.
When traveling for work, record your car mileage to claim a deduction. The current rate is $0.54 per mile.
Since you are probably using a lot of minutes just for work, the same is true for your cell phone. Track how often you use your phone for business and determine what percentage of the cell phone bill can be applied to your business use and then deduct this amount.
5. Home Office Deduction
If you work from home and have a dedicated office space, calculate the square footage of the space and deduct the corresponding amount from your mortgage payment. The same is true for utility bills.
6. Employee Deductions
Small and medium-sized businesses rarely spend more on any single aspect of their business than they do on their employees.
The high cost of salaries and benefits can be offset, though, by the many deductions that are associated with hiring staff. Wages of salaried employees are deductible, as are the wages of independent contractors – which is a huge boon to small companies that can’t afford the cost of hiring people full-time. Contributions to employee retirement accounts are deductible as well.
7. Use a Professional Accountant
Accounting software makes filing taxes easy and cheap, but in the long run, it’s usually not going to get you the best deal. Hiring a professional accountant may be more expensive upfront than TurboTax, but with their depth of experience, in the vast majority of cases, a real-life professional will find ways to save you a lot more money than a computer program ever would.
If you have any questions about taxes or anything else related to small business accounting, feel free to contact us and ask.