Tax Deductions for Small Businesses

By Laura Schaefer
MoneyMix Contributor

When "Seinfeld's" Kramer told Jerry, "They just write it off," and Jerry replied, "You don't even know what a write-off is," we laughed. That's because a lot of us are just like Kramer-happy to toss around business jargon here and there, until someone tries to pin us down.

"Write it off" is one of those phrases that people say casually, as if everyone knows what it means. But do you? If you're on the verge of launching your own small business, it's a good idea to learn about a concept that could save you a lot of money.

There are dozens of tax deductions available to the self-employed and for small businesses. Your bottom line will be significantly healthier if you understand what they are. "One of the major advantages of owning your own business is that expenses you have personally may become qualified business deductions," explains David Rosenhouse, certified public accountant (CPA), Dallas. For example, "if you run a business out of your home, a portion of the rent or mortgage, utilities, homeowners association (HOA) fees, and the like may be deductible."

A deduction is any expense subtracted from your total income for the year. By reducing your taxable income, your tax burden is also reduced—potentially a lot. Keep reading for advice about what you can deduct and how to avoid some common pitfalls.

keep good records

"The biggest mistake that people starting a company make is failing to keep records," continues Rosenhouse. "Another pitfall I see is people not using qualified professionals when starting up their company. While the CPA will charge more than an online software program, frequently the tax savings&#151in a legal and ethical way—more than overcome this expense."

There are dozens of tax deductions available to the self-employed and for small businesses.If you read the phrase "keep good records" and immediately shudder at a vision of complicated spreadsheets dancing in your head, relax. You don't have to spend hours a week on record keeping. Simply set aside a few dedicated files or envelopes near your workspace for receipts and bills that pertain to your business. You can add them all up at the end of the year, or before your appointment with the accountant in the spring. For example, if you're a heavy computer user, keep receipts and bills for computer repair, printer ink, and your Internet connection.

Another good way to keep track of expenses is to open a dedicated business credit card and charge every business expense to that card. The credit card bill itself becomes the record. Open a business credit card through your credit union to enjoy affordable rates and fair terms.

what can I deduct?

"Tax-deductible expenses are almost anything that a small-business owner spends on something related to his or her business," offers Jan Zobel, enrolled agent tax preparer and author of "Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping." "One test of deductibility is, ‘Would you have had this expense if you didn't have your business?' "

A few examples:

An in-home daycare provider can take a tax deduction on equipment such as high chairs and toys.
A saxophone teacher can deduct the cost of renting studio space and purchasing music.
A freelance writer can deduct the cost of reference books, industry publications, and travel related to research.

Here is a list of common deductions:

Equipment pertaining to the business, including computers, printers, scanners, software, furniture, and cell phones
Continuing education in your field, including relevant subscriptions or association dues
Client meals, gifts, and entertainment
Travel expenses, including 55 cents a mile (adjusted annually to reflect changes in costs to drive) in your vehicle
Expenses related to a dedicated home office space, including a portion of your rent or mortgage and utility bills
Postage and office supplies
Health insurance premiums
Retirement and charitable contributions
Interest on business loans
Advertising costs

What about the cost of coffee? Unfortunately, your favorite energy juice is not a deductible expense unless you're buying it for a client.

"There are plenty of deductions for small-business owners, self-proprietors, and freelancers," says Mike Pascale, a freelance copywriter and storyboardist in Modesto, Calif. "Make sure you take those that are specific to your business. For instance, those in media, advertising, and entertainment are able to deduct whatever percentage of their cable or satellite TV bill, Internet usage cost, computer or smartphone, DVD rentals, Netflix subscriptions, magazine subscriptions, and related book purchases used for business purposes. [The] only caveat is to make sure the costs are realistic and can be proven for your business usage rather than personal."

When in doubt, find a good accountant and ask questions. Get a referral from a trusted friend or mentor and make sure your accountant understands all aspects of your small business so that he or she can give you a list of deductible expenses.

Another option is to ask the financial adviser at your credit union. It's important to get good information because taking incorrect deductions can result in an audit from the IRS (Internal Revenue Service).

incentives for small businesses

The government is eager to support small businesses, especially those that are brand new or growing. "Taxpayers can deduct up to a $5,000 start-up cost as a direct expense against income," advises Mark Steber, chief tax officer at Jackson Hewitt, Parsippany, N.J. "Some additional deductions also include costs for continuing education and client entertainment and meals."

Find tax forms, online resources, and other information.

Get a comprehensive guide to small-biz taxes.There may be specific incentives for your businesses because of where you operate. "Depending on where you are in the country, different states and cities will typically have a menu of programs to encourage investment in business and economic activity, sometimes in specific industries," explains Jonathan Breshin, who works with a private consulting firm specializing in identifying and securing economic incentives for businesses in New York and the tri-state area.

To make sure you're taking every possible tax deduction, question your accountant and financial planner to make sure he or she is up on current laws and incentives. And do your homework. "For excellent guides on what is and what is not deductible for your small business, go to the Small Business Administration website at SBA.gov and the IRS website at IRS.gov," advises Gloria Birnkrant, a CPA in Beverly Hills, Calif.

health-care deductions

One of the downsides of operating a sole proprietorship or small business is that you have to purchase your own health insurance. This can be a significant expense, especially if you're providing health insurance to employees, as well.

The good news is, health insurance premiums for the self-employed are 100% deductible-and there is a tax credit available for up to 35% of health-care premium costs for business owners with employees.

"Sometimes businesses don't meet all of the requirements to claim the tax breaks because they don't read through all of the provisions of the tax break," warns Ryan Himmel, CPA, registered security analyst, and founder of BIDaWIZ.com, an online marketplace for professional tax and accounting advice for small-business owners, entrepreneurs, and sole practitioners in New York. "For instance, to claim the health-care tax credit, you cannot employ more than 25 full-time employees and they must be paid a certain amount or the amount of the credit you can claim will decrease."

To get the full benefit of every tax deduction available to you, keep good records, hire a trustworthy accountant, and stay current on laws for small businesses. You'll be glad you did.

Laura Schaefer is a freelance writer in Madison, Wis. She is the author of "The Teashop Girls" and "Planet Explorers Travel Guides for Kids."