Still reeling from your small business tax bill for 2013?
As the sole proprietor of a fledgling home-based business, you weren’t really prepared for how big a bite Uncle Sam was going to take of your income, were you?
Well, unless you’re prepared to take a similar drubbing on your tax return for 2014, now’s a good time to do some advance planning to see if you can’t pare your tax bill for the current year.
No Time like the Present
Actually, Jan.1 would have been the ideal time to begin your planning for the 2014 tax year, but since that date is long past you might as well get started now and try to make up for lost time. Better late than never!
Can you imagine how poorly your small business might be doing today if you hadn’t invested the time and brainpower it took to ensure that its launch was a success?
Almost everything goes better with some advance planning, and that advice certainly holds true when it comes to taxes.
If yours is a typical home-based business that you operate on your own, you’ll probably be filing your business taxes as part of your individual tax return, whether as a sole proprietorship or a limited liability company, or LLC. This allows you to report your business income by attaching a Schedule C to your personal income tax return or Form 1040.
If your business flourishes and expands, perhaps someday you’ll move beyond the sole proprietorship or LLC status and begin operations as a partnership or corporation. Once that happens, you’ll have to report your business income on a Form 1065 for a partnership or Form 1120 for a corporation.
In the meantime, reporting your business income on your individual tax return is probably your best course of action.
Take care to properly distinguish between your personal deductions, which are itemized on Schedule A of your Form 1040, and business deductions, which are listed on your Schedule C.
Don’t Skip Any Deductions
However, because you’re filing as an individual it makes sense to ensure you claim all the deductions — personal or business — to which you’re entitled.
Check out these tips from Mint.com to be sure you don’t let any tax deductions slip by on the personal side.
When it comes to deductions for business expenses, keep careful records of all the expenditures that are made expressly for business purposes. Where possible, keep all receipts or, at the very least, all receipts for major expenses — those more than $75.
Here are some of the business deductions that often get overlooked when it comes time to file your tax return:
1. Office Supplies – Looked at individually, your purchases of printer paper, ink jet cartridges or toner, staplers, and other office supplies may seem fairly insignificant, but over time they add up. And they are all deductible expenses if used solely for business.
2. Home Office – Once considered an almost sure-fire way to trigger an audit, the home-office deduction has returned to favor and represents a significant deduction if you have set aside a specific area within your home exclusively for the conduct of business. It can be an entire room used solely for business or a portion of a room, providing it doesn’t do double-duty for personal pursuits.
The IRS in 2013 introduced a simplified formula for determining the home office deduction. Previously the deduction required fairly complex computations to identify what percentage of the home’s total square footage was occupied by the dedicated office space. The business owner could then deduct that percentage of the home’s total expenses — mortgage, rent, utilities, insurance — as home office expense.
While this standard formula for the deduction can still be used, the IRS now allows home office users to deduct $5 for every square foot of the actual home office’s area up to a maximum of 300 square feet.
3. Office Furniture – The cost of desks, filing cabinets, printer stands, and other furniture that is purchased for exclusive use in your home office may be deducted using one of two methods. You can deduct all of the furniture’s cost in the year of purchase or depreciate the furniture over the course of seven years.
4. Electronic Equipment – If they are being used exclusively for business purposes, you can deduct the cost of computers, tablets, printers, copiers, and scanners. As with office furniture, you can deduct each item’s cost in full in the year of purchase or depreciate over seven years.
5. Magazine Subscriptions – You can deduct the full cost of subscriptions to trade journals and other business-related publications in the year they were purchased.
6. Business Mileage – If you have a car that is used exclusively for business purposes, you can deduct almost all costs associated with the operation of that vehicle. If, however, you’re like most sole proprietors, particularly beginners, you’re probably using one car for both personal and business purposes. You’ll need to keep careful records to establish how much of your total mileage was used in the pursuit of business. For the 2014 tax year, you can deduct 56 cents for every business mile driven. Also deductible are other auto-related expenses, such as tolls and parking fees for business trips.
7. Business Travel and Entertainment – Traveling out of town to see a client or attend a trade fair? Your transportation and accommodation costs are 100 percent deductible. As are such associated travel expenses as dry cleaning/laundry, rental cars, and tipping the hotel doorman. Keep your restaurant costs down, though, because the IRS only allows you to deduct 50 percent of the cost of meals during business trips.
If you’re entertaining a client, talking with a prospective customer, or chatting up an independent contractor over dinner, you can also deduct 50 percent of the cost of those meals no matter where they occur.
8. Health Insurance Premiums – If you’re the sole proprietor of your business and you’re paying your own health insurance premiums, they’re 100 percent deductible. However, if you are eligible to be covered under your working spouse’s medical plan, you won’t be able to take this deduction.
9. Non-employee Compensation – Although yours is a home-based business with you as its only full-time employee, you may find it necessary from time to time to farm out tasks to independent contractors. The money you pay them for their work is deductible as a business expense.
Photo credit: Image courtesy of Stuart Miles / FreeDigitalPhotos.net
About the Author: Don Amerman is a freelance author who writes extensively about a wide array of business and personal finance topics.