Tax Benefits for Small Businesses

What can I deduct as a small business owner?

Here are the ten categories that can provide you with valuable tax deductions:

• Vehicle Expenses
• Education Expenses
• Travel Expenses
• Communication Expenses
• Advertising and Other Business Expenses
• Home Office Expenses
• Self-Employed Health Insurance Premiums
• Sales Taxes
• Retirement Plans
• Upfront Depreciation
  

Some of the deductions and/or credits that you’ll be eligible for are pretty straightforward, but others are not – and this is where PRO-TAX can help. 

How much can I deduct in these categories?

Let’s say, for example, that you do have a workspace in your home used for your profitable hobby.

1. Deductions for personal as well as business activities (home mortgage interest and taxes) may be taken in full.
2. As long as the deductions in Number 1 do not exceed the hobby income, you can next deduct hobby activity items such as advertising, insurance premiums and wages.
3. Last, business deductions that reduce the basis of property (depreciation and amortization) can be taken, but again only if the gross income for the hobby activity is more than the deductions taken in the first two categories.

In other words – the total of itemized deductions, beyond the normal deductions you would claim if you were not involved in an income-producing activity, CANNOT exceed the hobby income.

EXAMPLE ONE:  Jill has hobby activity income of $2,000.  Her normal itemized deductions are for home mortgage interest ($1,500) and property taxes ($500).  Jill cannot take any further deductions.

EXAMPLE TWO:  Jill’s hobby activity income is $3,000 and her normal itemized deductions total $2000.  Jill paid $1,000 in advertising expenses for her hobby.  She can deduct this, but she cannot deduct any depreciation or amortization for any equipment.

EXAMPLE THREE:  Jill’s hobby activity income is $4,000.  She has normal itemized deductions ($2,000) and advertising expenses ($1,000) to deduct, leaving her with a profit still of $1,000.  Jill had to purchase some equipment for her hobby and would like to depreciate it.  She can depreciate the equipment, but only up to $1,000.

How do I take a deduction for depreciation?

Let’s say you bought an expensive new computer as part of your home business. It is business “equipment,” but you generally cannot deduct, in one year, the entire cost for the use of the computer in your income-producing hobby or business if it has a useful life beyond the tax year. Instead, you can depreciate it. That is, you can spread the cost over a number of years, and deduct a part of the cost each of those years. There are other circumstances under which you might be able to recover all or part of the cost of the qualifying computer by deducting it in the first year it is placed in service. Talk to your PRO-TAX professional for guidance in this area.

What actually qualifies business use of a home?

There are two scenarios in which you can deduct for business use of your home – as an employee of someone else or as a business owner. But care must be taken. Various items - including the amount of use, purpose of area, kinds of expenses - can affect both whether there can be a deduction and the amount of deduction available. 

If you are both an employee and business owner, direct and indirect expenses play an important role in determining how much of certain items are deductible. In short:

• Direct expenses benefit only the business part of the home (painting or repairs made to the specific area or room dedicated specifically for the business). 100% of direct expenses are generally deductible against business income of the business owner.
• Indirect expenses apply to both the business and personal parts of the home (upkeep and running of the entire home, mortgage interest, points).  The business percentage of all indirect expenses is generally deductible against the business income of the business owner.

Note:  The business percentage may be different for each item. And where the deduction is claimed depends on whether it’s an employee or business owner who is taking deductions. Several different forms and schedules may be involved, but the time taken can result in big tax savings for you!

Bring your business return questions to your local PRO-TAX office. You will find experts there with the necessary skills to help! Call us at 1-800-809-2829, or Click here  for a guide to our locations.

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