Let’s start with my personal favorite: TAXES. Yes, most entrepreneurs are able to deduct taxes they pay in operating their businesses. That being said, there are some rules for how and when to deduct:
- Sales taxes paid for business purchases should be deducted as part of the cost of the total item. This holds for all your normal day-in/day-out business purchases – think: supplies. As for larger purchases, a company car, these are capital expenses, and the taxes are added to the car’s cost basis, which is deducted over several years.
- Employment taxes paid for your employees are deductible as a business expense. If you are a sole proprietor or self-employed, your self-employment taxes are deducted on your personal tax return, not your Schedule C.
- If you pay real estate taxes for property used for business, you can deduct those taxes.
New business owners are known for putting in some serious drive-time. Most of us think “mileage” when talking about deducting auto expenses, but if you have a newer car primarily for business purposes, you might be better off going the actual expenses route. Instead of tracking miles, you track the actual expenses of operating and driving your vehicle, and that means you can deduct depreciation. Work with your tax professional to find out which method works for you, because once you choose, it can be a hassle to switch.
Starting a Business
If you started a new business in 2010, first, Congratulations! Now, you need to think about deducting the expenses associated with starting a business. Amounts you paid for advertising, supplies, repairs, utilities, etc, prior to opening your doors are deducted as capital expenses. This means there is a cap on how much you can deduct. In 2010, you can deduct up to $10,000, with any remaining amounts deducted over 15 years. Of course, once your doors are open, those costs are deducted as business expenses.
No business can operate without credit, but that credit comes at a cost: interest. Lucky for entrepreneurs, interest incurred for business purchases is 100 percent deductible. So hold on to your credit and loan statements, and deduct the amount of interest you paid in 2010.
We must also discuss a harsh reality in these tumultuous economic times: bad debts. I think we have all been there, people who order, but never pay. It can take slim profit margins and reduce them to nothing. Fortunately for some, if your business sells actual goods, you can deduct the cost of the items that sold, but were never paid for. On the other hand, if your business is a service, there is no deduction allowed for bad debts. Bummer, but perhaps that little nugget of information can prompt you to evaluate your payment terms and get at least part of the sale up front.
If you purchased new equipment for your business in 2010, you may be able to write off the entire cost this tax season. How? Section 179, baby! I have written about this invaluable tax break before (http://www.womenentrepreneur.com/2009/10/new-tax-laws-equal-tax-savings.html) but the basic idea is that you may be able to deduct up to $250,000 of the cost of new equipment that was put into service by December 31, 2010. There are restrictions and phase outs, but for small business owners who made significant capital expenditures last year, this deduction can be a life saver.
What if you purchased some expensive software last year? Generally, you are required to depreciate the costs of business software over 36 months. However, lucky for you these costs are eligible for the Section 179 deduction, so long as it was purchased and placed into service as of December 31, 2010. This includes any software that came with a new computer system, or was purchased separately.
If your business is an S corporation, an LLC or a partnership (in other words, a pass through entity), the business can make charitable donations, and pass the deduction on to you. This includes gifts of cash, or donated office supplies, like computers and desk chairs. If your business is a regular C corporation, the company can take the deduction itself. There is a caveat here, however. If you donate office furniture or computers, and they have been fully depreciated, your business will not receive a deduction. You can still donate and enjoy the sense of good will, but there is no tax benefit. Either way, it pays – in either tax breaks, or community appreciation – for your business to be charitable.
Advertising and Promotion
There is a quote credited to advertising legend Steuart Henderson Britt, “Doing business without advertising is like winking at a girl in the dark. You know what you are doing, but nobody else does.” In other words, your business may be exactly what someone needs, but if you are not advertising, they will never find out about you. Because advertising and promotion is so crucial to your business, those costs are all deductible. Remember to keep track of all your advertising expenses, including the costs for designing and producing any advertising, and the costs for placing those ads.