If you made money from a small business last year, you’re going to have to pay taxes on your profits. Unfortunately, not all the money that comes in is profit. Expenses take a portion of the money we make in a small business. Fortunately, many of the expenses incurred can be deducted on income taxes.
Home Office Exclusion
Most people are aware of this deduction, but a new provision for the tax year, 2013 has changed the way this deduction is computed. Figuring the tax deduction has become much easier. A qualified taxpayer can figure the square footage of the space used for a home office times the prescribed rate. This is in lieu of figuring actual expenses of a home office.
Cost of Goods Sold
The following items are included in the cost of goods sold:
- The cost of products or raw materials, including the freight
- Storage
- Labor costs for workers who produce the product
These costs have certain restrictions, which can be determined by consulting one of the tax guides provided by the IRS.
Capital Expenses
These costs are part of investment in your business. The following types of costs are included:
- Business start-up costs
- Business assets
- Improvements
Personal vs. Business Expense Deductions
Personal, living, and family expenses are usually not deductible. If you have an expense for something used partly for business and partly for personal use, you can divide the use by percentage and deduct the portion for business expense.
Suggested Deductions
The following categories can be legally deducted from income. Some of these are things that the average business owner may not have considered:
- Home office – to reiterate, the method of figuring this has changed. The burden of proof about usage is up to the business-owner.
- Office supplies – You can deduct these whether or not you use the home office deduction. Keep receipts carefully.
- Furniture – You can deduct 100% of this in the year of the purchase or depreciate this cost using an IRS chart for each year’s calculations.
- Office equipment – Computers, copiers, and fax machines can be deducted as purchased or by an IRS chart.
- Software and subscriptions – Software is now deductible in the year purchased rather than being amortized.
- Mileage – If you use a car in business, keep a notebook in the vehicle to record date, mileage, tolls, parking, and use.
- Travel and meals – The cost of hotels, airfare, train fare, or automobile costs is 100% deductible. Meals, however, can only get a 50% deduction.
- Insurance premiums – Costs of health insurance premiums are 100% deductible. Restrictions apply to this – you must be a proprietorship, and you must not be eligible for other health care coverage.
- Retirement contribution – This is deductible on your personal tax return.
- Social Security – You can deduct half of the cost of Social Security on your personal 1040.
- Telephone charges – All of the costs of business calls that you make from home are deductible. Keep track of the usage on your bills.
- Child labor – If you operate a sole proprietorship or a partnership in which you and your spouse are the only partners, you can deduct the salary of your child under 17. Again, be sure to document this employment carefully.
