For the small business owner, tax season can be stressful, and the prospect of shelling out a load of money to the government is not exciting. That’s why small business owners love tax benefits. Here are 5 tax benefits that are often overlooked by small business owners that can save your business money. (For related reading, see: Starting A Small Business: Taxes.)
Please consult your tax professional before following any of the suggestions below. If you do your taxes yourself, there is a resource which compares the online offerings of TurboTax, TaxAct, and HR Block.
1. Have Lunch Meetings
If you often buy lunch (eat-in or take-out) while you are working, you might be able to deduct 50% of meal expenses. If you and your business partners or employees have meetings, consider having meetings over lunch. As long as the dining expenses are reasonable, you are allowed to deduct 50% of meal costs when eating with business partners and employees while conducting business operations. If you buy lunch every day and spend around $8, you can deduct $4. If you do the math, that amounts to over $1000 a year in claimable deductions ($4/day x 5 days x 52 weeks).
2. Use Your Personal Cell Phone For Business Calls
Let’s say you use around 30,000 minutes per year on your phone, for both personal and business reasons. You spend around 60 minutes a day on business calls for the average work week. That’s around 15,600 minutes a year you will spend on business calls (60 minutes/day x 5 days x 52 weeks) -- over 50% of your total yearly phone minutes. Based on the figures in this scenario, you could deduct over 50% of total annual personal cell phone costs as a business expense.
The key is to make sure you are getting an itemized list of your monthly phone bill, so that you have evidence in case the IRS would ever decide to audit your business. It would be smart to get a separate business number that routes to your phone, making incoming calls much easier to separate. Assuming a $100-per-month phone bill (average bill over $100/month) and a 50% deduction, you could save an extra $500 in deductions ($100/month x 12 months x .50 deduction)
3. Deduct Your Health Care Premiums
If you have an individual health plan (cannot be a group plan) and pay your healthcare premiums out-of-pocket (cannot be pre-tax) without tax breaks or subsidies, you can probably claim those premiums as an income tax deduction. To claim this deduction, you must be a sole proprietor, partners in partnership, or an LLC, or S corporation shareholder who owns more than 2% of company stock. Let’s say you are a sole proprietor and your business/personal income was $60,000 and your state and federal income tax obligations are around 30%. If you spent $10,000 on health insurance premiums for you, your spouse, and your dependents, you can deduct that to make your total income $50,000 instead of $60,000, saving you around $3,000 in total income tax payments.
As a business owner meeting the criteria above, you can claim a $10,000 income tax break, but not a break for self-employment tax, which would remain at $60,000 taxable income(Small businesses pay both.). However, if your spouse is an employee of your company, you can get both. You can purchase a plan in his/her name (not in the name of the business) that covers the two of you and your dependents. Since she is both an employee and your spouse, you can deduct the full $10,000 in payments from both your business income tax and your self-employment tax, assuming you file jointly. In this scenario, you could save $3,000 on income tax and an additional $1,530 in self-employment tax, for total savings of $4,530. (To read about other tax benefits that self-employed individuals can take advantage of, see article: 10 Tax Benefits For The Self-Employed.)
(For a further explanation, see this article.)
4. Manage your taxable income so that you end up in a more favorable tax bracket
Depending on your taxable income, your tax rates can vary significantly -- by up to 10% for both individuals and corporations from one tax bracket to another.
Let’s say your company is an LLC and you are several weeks away from the end of the business year. You check your taxable income and find that so far it is $80,000. You need to purchase some new equipment, that will cost, in total, $15,000. If you make those purchases now, they will push your taxable income back down to $65,000 or so, which puts you in the $50,000 - $75,000 income tax bracket (25%). If you wait, your business will be in the $75,000 - $100,000 bracket (34%).
If you go ahead and make the purchases to put you in the lower tax bracket, you could save up to $11,600 in income taxes. Of course, this can get tricky because then you don’t have those savings next tax period. But, if you are consistently purchasing new equipment for your business and manage things correctly, you can save money each year by watching your tax brackets and adjusting business purchases accordingly.
5. Deduct travel costs and save your airline miles for personal use
Business owners often rack up points on their miles card and figure that they can reduce business travel costs by using their miles for business flights. However, if they also fly fairly frequently for personal trips, this is a mistake. Business travel costs are fully deductible as a business expense; personal travel costs are obviously not.
Let’s say you spend $5,000/year on business flights and $2,000/year on personal flights, have a business income of $60,000/year, pay around 30% in state and federal income taxes, and accrue $2,000/year in airline miles. Instead of paying $18,000 in taxes ($60,000 x .30), you pay $16,500 in taxes ($60,000 - $5,000 travel costs x .30). As a result, you save $1,500 in income taxes and another $2,000 in personal travel costs (that you cover with your airline miles), thus saving a total of $3,500/year in costs.
The Bottom Line
Using these 5 tips, you should be able to save some money on your taxes this year. Of course, tax benefits can get pretty complicated, so be sure to check with your tax professional concerning these benefits. (For related reading, see slideshow: The Most Controversial Tax Deductions.)
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