Tax deductions and credits are crucial to your company's bottom line. But with the federal tax code now stretching to more than 73,000 pages, figuring out what you can and can't claim can be challenging. These tips can help you minimize your tax bill without agitating the Internal Revenue Service.
Back to basics:
We'll start by reviewing the nuances of some basic deductions that small businesses routinely take but sometimes misuse:
Travel and meals. You can deduct 100 percent of business travel expenses, such as hotel bills, air fare, taxi fares and all related tips. But you can deduct only 50 percent of the cost of business meals. Note that you can deduct meals taken solo while traveling for work outside the city or general area where your business is based, but not while you're in that area. So running across town to try the new sushi restaurant for lunch isn't deductible.
An exception to the 50 percent rule, notes Adam Shay, a certified public accountant in Wilmington, North Carolina, is for meals served at annual company outings such as holiday parties. Their costs are 100 percent deductible.
Vehicle expenses. You can deduct the cost of using your vehicle for business, including ordinary and necessary expenses associated with its operation. But you must keep a current vehicle mileage log, and claim deductions only for use related to business activities. Unfortunately, commuting from your home to your place of business doesn't count as one of those activities.
Gifts. Gifts to clients are deductible, but only up to $25 per recipient annually.
Home office. If you work from home some or all of the time, you may be able to claim a tax deduction for a pro-rata percentage of home-related business expenses such as rent or mortgage, insurance and utilities. But the rules for claiming this deduction are strict.
First, your home office must be your principal place of business. If you run a machine shop several miles from your home and conduct a substantial portion of your duties from that shop, you probably can't claim your home office. By contrast, if you spend most of your time on the road but do the bulk of your administrative work in the room over your garage, you probably can. Just make sure you don't have the kids playing video games in there; your home office must be used regularly and exclusively for your trade or business, notes Dave Du Val, vice president of tax services for TaxAudit.com.
Internet, phone and cable services. Generally, these are all tax-deductible expenses when incurred at your place of business. If you want to claim them for a home office, you'll need to pro-rate them, claiming only the percentage related to business use, says CPA Scott Berger, a principal with Kaufman, Rossin & Co. in Boca Raton, Florida.
Deductions and credits you shouldn't overlook:
Among the tax benefits most often overlooked by small businesses are tax credits and deductions the government offers for what it considers beneficial behaviors -- providing certain employee benefits, for example, or hiring certain types of people. Here are some you might be able to take advantage of:
The health care tax credit. Created by the Patient Protection and Affordable Care Act of 2010 -- Obamacare -- this tax credit is generally available to your small business if you have fewer than 25 full-time equivalent employees who earn an average of less than $50,000 per year, excluding salaries paid to you or your family. You also must pay at least half of their health insurance premiums through a qualified plan or "arrangement."
Your ordinary tax deduction for health insurance premiums will be reduced by the amount of the credit, notes Steve Warren, a CPA with Lehrman, Flom & Co. in Minneapolis, but a credit is worth more than a deduction, so it still can be a good deal. For example, if you pay $40,000 a year toward 10 workers' health care premiums and qualify for a 35 percent credit, you would save $14,000 on your tax bill before considering the reduction to your health insurance deduction.
Work Opportunity Credit. This tax credit, which can range from $2,400 to $9,600, is available for each person hired from certain target groups that historically have faced barriers to employment. They include military veterans who meet certain unemployment, disability or financial-aid criteria, ex-felons, certain people living in federally designated Rural Renewal Counties or Empowerment Zones, and people who have been receiving various forms of federal financial assistance.
Fringe benefits. You can generally claim a tax deduction for fringe benefits provided to your employees, such as group term life insurance, parking and mass transit or van-pooling services, notes Mike Scholz, a partner in the Tax and Business Services group at Wegner CPAs in Madison, Wisconsin.
Retirement plans. Too many entrepreneurs don't bother to establish retirement plans, forgoing not only valuable tax breaks but also important retirement benefits down the road, says attorney Bruce Givner of Givner & Kaye in Los Angeles. He encourages older business owners in particular to consider starting a defined benefit pension plan, which can allow much bigger annual contributions -- up to $250,000 -- than other types of plans. That can be attractive for owners who postponed retirement saving and need to sock away as much as possible in their remaining work years.