It’s up to you to keep the appropriate records and take advantage of the available IRS income-tax deductions. There’s a fine line between cheating the system and not cheating yourself.
Here’s a look at a few of the breaks available to small-business owners for the 2013 tax year.
1. Home-Office Deductions – Many small-business owners work from home. The home-office deduction allows these taxpayers to deduct a percentage of their mortgage interest and utility bills that’s equal to the proportion of the total square footage of the home that their dedicated office space occupies. Note that the space must be used exclusively and regularly for business purposes.
“One mistake to avoid is not having a full and complete understanding of the home-office tax deduction. It’s a great way to minimize your tax liability, but only if your office truly qualifies to take it,” warns Andrew Schrage, editor and co-owner of Money Crashers Personal Finance. “Research the IRS website for details or consult with a tax professional. Be sure to do the same before taking any other tax deduction or credit — the last thing you want is to have to deal with an audit.”
For the 2013 tax year, there’s a simpler option for the home office deduction. The IRS is allowing taxpayers to deduct a standard rate of $5 per square foot instead of calculating the actual percentage of all expenses, up to 300 square feet.
2. Office Supplies — Any supplies you purchase for your business qualify as a tax deduction, according to IRS Publication 587. That means paper, ink, stamps, envelopes, and anything else you use in the course of doing business. Keep all your receipts in a central location for easy access at tax time. Better yet, document all your expenses as you go in an expense-tracking or accounting software program.
3. Education and Training — If you attend conferences, training workshops, or industry events to expand your expertise, you may deduct these costs from your net income. This differs from the American Opportunity Credit and other higher-education tax benefits available to traditional students.
Deductions for job-related education and training qualify as miscellaneous expenses, and the following qualifying criteria apply:
- You must itemize your deductions.
- Your miscellaneous deductions must exceed 2 percent of your adjusted gross income.
- The training must maintain or improve your job skills, or be required by your employer to maintain your job status.
Under the education and training tax benefit, you may deduct more than just the actual cost of the training event or tuition, including books and materials, facility or lab fees, lodging and transportation, and the cost of research and related expenses.
4. Startup Costs — If you started a business in 2013, you may deduct all the costs of getting your business up and running. “Expenses incurred during the startup of a small business are tax deductible and include things like the costs associated with finding a location for your business, marketing, and employee training. You [may] write off as much as $5,000 worth of expenses the first year you are in business,” Schrage says.
5. Travel — Various travel costs are often overlooked by small-business owners. Taxpayers may elect to use either the standard mileage rate or the actual expenses of operating a vehicle for business purposes as a tax deduction. The IRS raised the standard mileage rate for 2013 to 56.5 cents per mile (a penny increase over the 2012 rate).
If you travel to an office-supply store to purchase printer paper, for instance, you may deduct the standard mileage rate based on the round-trip miles to and from the retail location. Likewise, you may deduct any travel related to training and educational events, industry conferences, meetings with clients, or any other business endeavor. Throughout the course of a year, this deduction adds up!
6. Software and Subscriptions — There are two different ways to deduct software and subscriptions used for maintaining financial records, managing social media profiles, or any other business-related function. One is under the Section 179 Deduction (or Depreciation), which addresses tangible property and applies to off-the-shelf software, as described in IRS Publication 946.
If you pay for an entire subscription up front, the fee is considered a prepaid asset and a capital expense. The cost is spread out over the term of the license or subscription. In other words, you may only deduct one-third of the cost for the 2013 tax year for a license purchased in 2013 that lasts three years.
If you pay on a monthly basis, however, these costs are deducted as they’re paid as an operating expense. The end result is basically the same: You’re paying for what you’ve used or are reasonably assumed to have used in a given tax year.
7. Capital Equipment — Other business equipment falls under the Section 179 deduction. Through the end of 2013, businesses may deduct up to $500,000 worth of capital equipment without depreciation.
In other words, you may deduct the full amount of both new and used equipment under this benefit in a single tax year. It’s a perfect time to purchase new gear for your business — such as computers, office machines, and other tools — and take advantage of the tax savings before the end of 2013.