7 Top Tax Deductions for Your Small Business
1. New Equipment
Some small businesses can write off the full cost of some assets in the year they buy them, rather than capitalizing them — deducting their cost over a number of years. (See Nolo’s article Current vs. Capital Expenses for information on expenses that must be capitalized.) Under Section 179 of the Internal Revenue Code, you can currently deduct up to an annual threshold amount the cost of equipment and certain business assets you purchase and place in service that year. Some assets don’t qualify for the Section 179 deduction, including real estate, inventory bought for resale, and property bought from a close relative.
For 2014, the Section 179 threshold amount has been restored to its original $25,000 limit (adjusted for inflation). This is a dramatic decrease from recent years when the annual threshold was as high as $500,000 (2010 through 2013). Congress raised the limits in recent years to help small businesses in a struggling economy and may increase the limit for 2014. Watch for updates.
The first-year bonus depreciation deduction in effect for 2012 and 2013 is also no longer available in 2014. This special deduction allowed taxpayers to depreciate an additional 50% of the adjusted basis of qualified new property during the first year the property was placed in service. This deduction could be taken in addition to the Section 179 deduction and offered tremendous tax savings.
2. Moving Expenses
If you move because of your business or job, you may be able to deduct certain moving costs that would otherwise be non-deductible personal living expenses. To qualify, you must have moved in connection with your business (or job, if you’re an employee of your own corporation or someone else’s business). The new workplace must be at least 50 miles farther from your old home than your old workplace was. (Technically, moving expenses aren’t business expenses; there’s a special place to list them on your Form 1040 tax return.)
As a general rule, software bought for business use must be depreciated over a 36-month period, but there are some important exceptions:
- Computer software placed in service from January 1, 2003 through December 31, 2013 is eligible for a Section 179 deduction, which means that 100% of the cost of software can be deducted in the year purchased.
- When software comes with a computer, and its cost is not separately stated, it’s treated as part of the hardware and is depreciated over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year if the total cost is within the Section 179 annual deduction amount (see Section 179 discussion above). See IRS Publication 946, How to Depreciate Property.
4. Charitable Contributions
If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.
If you’ve got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. However, if the equipment has been fully depreciated (written off), you can’t claim a deduction.
Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax:
- Sales tax on items you buy for your business’s day-to-day operations is deductible as part of the cost of the items; it’s not deducted separately. However, tax on a big business asset, such as a car, must be added to the car’s cost basis; it isn’t deductible entirely in the year the car was bought.
- Excise and fuel taxes are separately deductible expenses.
- If your business pays employment taxes, the employer’s share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn’t a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement — for example, to build a sidewalk — it isn’t immediately deductible; instead, it is deducted over a period of years.
6. Education Expenses
You can deduct education expenses if they are related to your current business, trade, or occupation. The expense must be to maintain or improve skills required in your present employment. (The cost of education that qualifies you for a new job isn’t deductible.)
7. Advertising and Promotion
The cost of ordinary advertising of your goods or services — business cards, yellow page ads, and so on — is deductible as a current expense. Promotional costs that create business goodwill — for example, sponsoring a peewee football team — are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the “Southwest Auto Parts Blues” or listing the business name in the program is evidence of the promotion effort.
Easily Overlooked Business Expenses
Here are some additional routine deductions that many business owners miss. Keep your eye out for them.
- audiotapes and videotapes related to business skills
- bank service charges
- business association dues
- business gifts
- business-related magazines and books
- casual labor and tips
- casualty and theft losses
- coffee and beverage service
- consultant fees
- credit bureau fees
- office supplies
- online computer services related to business
- parking and meters
- petty cash funds
- promotion and publicity
- seminars and trade shows
- taxi and bus fare
- telephone calls away from the business
Note: Just because you didn’t get a receipt doesn’t mean you can’t deduct the expense, so keep track of those small items.