April 3, 2014
The tax man cometh, and for those of us in small business, he cometh a lot. If you thought you took a hit in 2013, wait until you see what's in store in 2014! The top rate will jump from 35% to 39.6%. Although most people won't take that big a hit unless they're making $400,000 ($450,000 as a married couple), even lower income earners may feel the pinch, according to a FoxBusiness.com article.[1] Then there are increases in long-term capital gains and a new Medicare tax on investment income. State taxes are going up, too. The bottom line is that the government wants your money. Your business plan is to keep as much of it as you're legally entitled to. The best way to do that is to not overlook a single legitimate deduction. That's easy if you have a CPA. But if you're a sole proprietor going it alone in a spare bedroom, especially if you're one of the thousands of people who started home businesses this year to supplement income or in response to a lackluster job market, you may not be aware of all the available deductions.
Dana Dratch, writing for FoxBusiness.com, lists the following deductions available to small business owners that are sometimes overlooked:
- Home office – a room or a portion of a room that is used exclusively for your business and nothing else. To compute the deductible amount, measure the area you use for your home office and divide it by the entire square footage of your home. Use that percentage to figure out how much of your rent or mortgage, utilities and homeowners or renters insurance you can deduct.
- Office supplies – this includes pens, pencils, printer paper and cartridges, staples, paper clips and similar items.
- Office furniture – from Aeron chairs to Ikea file cabinets, you can either deduct 100% of the total cost of any office furniture you buy during the year, or depreciate it incrementally over seven years using the IRS chart to make the calculation each year.
- Other office equipment – this includes your computer and peripherals, printer and similar devices. Again, it can be a one-time 100% deduction or a depreciation over five years.
- Software– for 2013 taxes, you're allowed to deduct this 100%. We're waiting to see whether Congress extends it for 2014 and beyond.
- Business- and industry related subscriptions – they are 100% deduction for the tax year in which they were purchased.
- Mileage – you can deduct your total business mileage (not counting your commute to and from any out-of-home office) plus parking and tolls factored at 56.5 cents per mile in 2013 (and 56 cents in 2014). Or, you can factor the number of business miles against personal miles and use that percentage to calculate your deduction for car maintenance, auto insurance, gasoline, car repairs, lease payments, etc. If you're purchasing the car, factor the interest you're paying on the loan and depreciate it. If you're working out of a home office, you get to deduct the entire cost of business-related mileage.
- Travel and entertainment – The cost of lodging, plane or train tickets, rental cars and tips on business-related trips is 100% deductible. Meals, however, are only 50% deductible, whether you're on a business trip or entertaining a client in your hometown.
- Client gifts – You can deduct 100% of what you spent on tchotchke for clients, up to $25 per person.
- Social security – you can deduct half of your self-employment contributions.
- Health insurance premiums – if you are self-employed and paying for your own health insurance, those premiums are 100% deductible. The deduction, however, can't be greater than your net profits, and if you were eligible for some other coverage such as a spouse's health insurance, you don't qualify for the deduction. However, if a spouse worked for you, his or her premiums are 100% deductible, as are those for you and any children covered by the spouse's policy as dependents.[2]
There is also credit available to small businesses that provide health insurance for coverage under the Affordable Care Act. According to Bruce Freeman, a small business accountant, "While health insurance that a business provides to an employee has been a deductible, small business can also claim a credit for providing health insurance coverage to employees."[3] SBA Community Moderator Meredith K. Olafson cautions that to qualify for the small-business health care tax credit of up to 35% of your premium contribution, you must have, "fewer than 25 full-time equivalent employees, pay average annual wages below $50,000 [and] contribute 50% of more toward your employees' self-only health insurance premiums."[4] Olafson notes that this credit increases to 50% in 2014, for anyone who meets the criteria and buys health insurance coverage from the new Small Business Health Options (SHOP) exchanges.
The tax experts at J.K. Lasser [5] suggest you add these insurance premiums to your deductible list:
- Business owner's policy (BOP)
- Business interruption coverage
- Directors and officers policies for Errors and Omissions
- Workers' compensation, unemployment insurance and similar employee-related coverage
- Key person life insurance, but not personal life insurance to cover your family
- Professional liability coverage for Errors and Omission.
If you need insurance coverage for your small business including health insurance, auto insurance, homeowners or renters insurance, and professional liability coverage, you can shop for competitive online insurance quotes here.
[3] Bruce Freeman, "Small Business Professor: Forgotten tax deductions for small-business owners," http://www.sacbee.com/2014/03/20/6252726/small-business-professor-forgotten.html
[5]"Insurance Premiums: Which Are Deductible?" http://www.jklasser.com/articles/insurance-premiums-which-are-deductible/
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