Small Business Tax Credits
Trying to find loopholes to avoid paying the IRS taxes you owe and, on the other hand, not availing of tax credits you are owed, are both unforgivable errors which can cause a lot of pain and loss to your small business. Listed below is a checklist of deductions available for small businesses which help you balance these two issues.
Home Office deductions are a source of much controversy and debate. Most of it is unwarranted. If you correctly interpret what the IRS thinks is a home office, there is no reason not to accept deductions. According to the requirements, it must be a space within your home, totally devoted to office work, and nothing else. If you are able to achieve that in a provable manner, then you can accept deductions for a percentage of the total home expenses. The percentage is calculated based on the area covered by your home office, as compared to the total square footage area of the house.
Save and file receipts for all expendable items and supplies purchased for business use, which can then be used to offset your taxable business income. Do not forget to include the cost of furniture and other necessities associated with your business work. Also in this category are office automation products, such as computers and peripherals, software, fax and copier machines.
Travel related expenses can be used for deductions. These include mileage, tolls and parking costs. It is necessary to maintain a through log of all your business travel, including date, mileage covered on specific trips, polling and parking charges and the purpose of the trip. For 2007, the mileage tax deduction was 48.4 cents per mile and it has been raised to 50.4 cents per mile for the year 2008. So you can multiply your total mileage by 50.4 cents, and add in parking and toll charges to claim your travel deductions. Please note that if you do not run a home business, the travel for which deductions are available starts from the location of your first business visit on a given day, and ends at the last visit of the day. A trip to or from your house is not eligible for deductions unless you have a home office. If you do have a home office, the mileage calculation can start right outside your front door. Other traveling expenses, including air fare, travel by rail, hotel stay and all other related expenses except meals are 100% deductible. Meals on the road are 50% deductible.
Health insurance premiums for those who are self employed and pay their own premiums are 100% deductible, if equal or less than the net profit. These deductions are subject to certain conditions, including non-availability of employer paid insurance offered to your spouse. If your employ your spouse and pay for her insurance, you must also offer the same benefits to other employees. Also eligible for tax deductions are long term care insurance premiums for you, your spouse or dependants – If paid for by you. Also eligible for deductions are retirement plan and social security contributions.
Telephone charges other than the actual bill for business related calls only are not available, if you are working out of your home. If you have a second line installed, which you use only for your business, all charges associated are available for deductions. If not, just keep a record of all the calls you made for business purposes, and you can claim deductions for those.
Employing your own children is also a smart way to boost deductions. Subject to the small business not being a corporation, a sole proprietor can claim deductions on all wages paid to his own children. This money can go a long way, since not only do you get tax credits for employing your own children, but you can also encourage children to invest part or all of the wages into a tax deferred investment vehicle such as a Roth IRA, thus keeping the money in the family, getting a tax deduction for it, and a tax deferral for your kids.
Lastly, try to implement, install and use clean energy producing equipment. If you use solar energy for heating and other purposes, there is a federal solar energy tax credit of 30% available until Dec 31st 2008. And it helps reduce global warming and gas costs.