Failing to claim all the small business tax deductions you’re entitled to is like flushing money down the toilet. As small-business owners prepare their taxes this year, it’s important they don’t miss any of these most commonly overlooked tax deductions, to avoid paying more money to Uncle Sam than necessary.
1. Home office deduction
Do you use a room in your home as your primary place of business, where you deal with patients, clients or customers? You may be able to claim a home office deduction, as long as you use part of your home exclusively for conducting business. That means using a room as both an office and a place for guests to stay, for example, probably disqualifies you.
If you qualify, you can begin to figure out how much you can deduct by either deducting actual expenses, or by using the IRS’s simplified method.
If you deduct actual expenses, only expenses incurred solely for the business part of your home will be eligible for full deductions (for example, painting or repairs in the area used for business). Indirect expenses — such as insurance, utilities, rent and general repairs — are deductible based on the percentage of your home used for business. Other unrelated expenses, such as lawn maintenance, are not deductible.
If you choose the simplified method, you figure your deduction by multiplying $5 by the square footage of the area of your home used for business. The IRS limits the area you can deduct under this method to 300 square feet, so the maximum simplified deduction is $1,500.
2. Startup expenses
You may be able to deduct expenses you paid to start your business, such as advertising, transportation, consultant fees, travel, employee training and wages, and legal and accounting fees.
Startup and organizational costs are usually considered capital expenses, which means you must amortize them — spread the deduction out over a period of years — rather than deduct them all at once in the year you pay them. However, you can deduct up to $5,000 in qualifying startup costs and $5,000 in organizational costs. The costs must be incurred in the year you started the business and before the day the business opened, according to IRS Publication 535.
Each $5,000 deduction is reduced by the amount by which your total startup or organizational costs exceed $50,000, and any remaining costs must be amortized over the next 180 months (15 years) of operation, beginning with the month after you started your business, according to the IRS. The details can get a little complicated, so it’s best to seek the help of a tax professional.
3. Auto expenses
Do you use your car at all for business? You may be able to deduct the costs of operating and maintaining the vehicle. You have a choice of ways to figure your deduction:
- You can use the IRS’s standard mileage rate for each mile your car was used for business purposes. The rate for the 2014 tax year was 56 cents per mile.
- Or you can deduct your actual car expenses for the year, which include gas, oil, tolls, lease payments, insurance, parking fees, registration fees, repairs and tires, according to the IRS.
Using the standard mileage deduction likely makes sense only if the total cost of all expenses is less than the deduction you’d get from taking the standard mileage.
What if you use the car for both business and personal driving? You can still take a deduction. The IRS says you just need to divide your expenses based on the actual mileage you used the vehicle for each. More details can be found in IRS Publication 463.
4. Losses on bad debts
Do you have bad debts or accounts receivable from customers that you know you cannot collect on? It’s not a total loss for your business, as it may be a deductible expense.
The IRS defines a bad debt as one that was created or acquired in your trade or business, or closely related to your trade or business, when it became partly or totally worthless. Types of bad business debts include loans to clients, suppliers, employees or distributors, and debts of an insolvent partner. They become bad debts only after you’ve tried to collect on them for a reasonable period of time and you’ve taken “reasonable steps to collect the debt but were unable to do so,” according to the IRS.
You can claim a deduction for a bad business debt only if the amount owed to you was previously included in gross income, according to the IRS.
5. Tax, legal and educational expenses
In general, the fees you pay to your accountant, lawyers or business consultants that are “ordinary and necessary expenses directly related to operating your business” are deductible in the tax year they were paid, according to the IRS. However, legal fees that are paid to acquire business assets are not deductible.
Other eligible deductions may include tax preparation fees paid in the previous year, licenses and regulatory fees paid to state or local governments, and expenses paid for the cost of education and training for your employees.
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