All Financial Matters

Ten Common Small Business Deductions

Starting a small business is one way to supplement your income. Small businesses do not have to operate out of a storefront. They can be started in your home. The government allows small businesses several tax deductions each year that some people may not be aware of.

The government looks kindly on the small business owner. They applaud your entrepreneurial spirit with tax deductions to lower your taxable income. Small business owners pay more taxes than they should because they are not aware of common deductions that are allowed.

1. Start-up costs. The biggest obstacle is getting over the hurdle of start-up costs. It can take a big slice out of the pie but you can get back a portion at tax time. Small businesses can deduct as much as $5,000 in their first year of business for starting costs. Costs include travel, advertising, and legal fees.

2. Vehicle use. The government allows you to deduct certain expenses for business vehicles including mileage. Keep good records for this deduction in case you are challenged on any point. If the vehicle is used for business and personal activities, you can deduct only the amount represented by the percentage used for business.

3. Equipment deductions. All businesses need equipment of some kind. The amount can be deducted all at once, up to but not exceeding $108,000.

4. Entertainment deductions. Who wouldn’t want to have a fancy dinner on the government? Business meetings over dinner or attending business conferences in sunny Florida can be deducted as business expenses. Meals are deducted at a rate of fifty percent.

5. Travel costs. Traveling for business is a tax-deductible expense. Keep your receipts for airline tickets, hotel stays, and meals. Any service that was necessary during the course of the business trip is subject to a deduction. Money spent on family members who are along for the ride is not deductible.

6. Advertising costs. You can deduct for expenses incurred for advertising. This includes print, billboard, radio, and television.

7. Legal fees. Businesses consult lawyers from time to time about business matters or to review contracts. The fees charged by your lawyer are tax-deductible.

8. Charitable contributions. Charitable contributions are tax-deductible based on the value of the item. Money given can be deducted for the actual amount, but goods can only be deducted for the amount received when they were sold by the charity, not what you paid for it originally. This includes cars.

9. Software deductions. Small businesses can deduct the cost of software purchased for exclusive use by the business. The deduction applies for the tax year that the software is purchased.

10. Educational expenses. Knowledge is power and more money in your pocket. Expenses for classes taken to further your knowledge for your present business are tax deductible.

Businesses have a distinct advantage when it comes to tax breaks. Take advantage of all the deductions available to you. Check with a qualified tax professional for further information on these and other tax deductions.

Stop Living Paycheck to Paycheck

No one likes to come to the end of the month and have nothing to show for it. After the bills have been paid, we wait until the next paycheck and do it all over again. Each month, learn to cut your debt and have more money at the end of the month.

If you ask a person how much money they would need to feel comfortable, they likely wouldn’t be able to tell you an exact amount. Most of us want to have enough for peace of mind. We want to be able to provide for our family, have money in the bank, and know that we won’t be bankrupt if the car breaks down or someone gets sick.

One way to ensure that is to work on a debt-free plan. It is hard to build wealth with debt hanging over our heads. To stop living paycheck to paycheck we need to use our paycheck in a different way. It may seem insurmountable now, but each step will now be leading us out of debt.

A budget is the first step. It is hard to see what can be eliminated from our spending if we don’t know what we are spending. Budgeting is a scary word for keeping track of our finances. Write down your expenses and your income. Most of us are already spending more than we bring in.

Decide what can be eliminated. If you eat out for lunch everyday, start carrying your lunch to work. Packing lunch for the kids stops them from buying costly meals at school.

Take on some of the jobs that you would typically hire out for. Teach the kids to mow the lawn. Designate one Saturday a month as “clean the entire house from top to bottom” day instead of using maid service.

Now let’s have a look at those credit card bills. Paying the minimum won’t cut it. At that rate you will be paying them off until you are eighty years old. Start with the small amounts and work your way through them. Pay the minimum for all except that one. Pay larger sums to eliminate your debt one card at a time.

It may get hard. Tell yourself that this is all for a good cause. Once the credit cards are paid off, hide them away to be used for emergencies only. Little by little you will gain control over your finances and with it will come the peace of mind you have been seeking.

Eventually, there will be money at the end of the month. You have shown yourself that you can live happily without the extra things you were spending money on before. Funnel that money into a savings account and/or certificate of deposits or mutual funds. It is time that the money you worked hard to save does some work for you.

Standard Mileage or Actual Expenses Deduction

Folks who use their vehicles for business or have vehicles dedicated to business can deduct the mileage for business travel. There is a standard mileage deduction that can be claimed on your tax return, as well as an actual expense option. Which is better? Read on to decide for yourself.

If you use a car, truck, van, or other vehicle to conduct your business, you are entitled to a deduction for the business miles that you drive. Since the government is strict on mileage for business as opposed to personal use for vehicles that do double duty, keep good records of gas receipts and odometer readings.

Business mileage is restricted to travel between the business office and other residences, or places of business for business reasons. You can drive to the post office from the business office to mail packages to clients. A vehicle can travel from a warehouse where products are stored to a client’s home for delivery.

Vehicles that are used for business and personal use must split the cost of the mileage deduction for tax purposes. If the car is used for business sixty percent of the time, then sixty percent of the mileage cost can be claimed on a tax return. Keeping a mileage log in the car can eliminate confusion when it comes to determining the mileage deduction.

There are two types of mileage deductions for business: standard mileage and actual expenses. The standard mileage for this tax filing year and going forward is 48.5 cents per mile. Only one mileage rate can be deducted in a certain tax year.

The best way to determine which will be the larger amount is to compare the two figures. For the actual car expenses, lease payments, depreciation, maintenance, repairs, insurance, and registration fees can be included in the actual expense deduction. A business that owns more than one vehicle such as a limousine service or moving company can calculate actual car expenses.

Standard mileage must the claimed the first year that you use a car for your business. After the first year, you can choose either option. The standard mileage option is not allowed when five or more cars are used in your business at the same time. If less than that number of cars are used one at a time or simultaneously, the standard mileage deduction can apply.

The standard mileage rate has limitations. It can’t be used if the vehicle in question is a taxi, or is used as a mail carrying vehicle, or you have claimed any other depreciation or deduction for the vehicle. Cars leased before the end of 1997 have to use the standard mileage rate for the entire period of the lease.

It is okay to calculate the two amounts and then decide. Whatever decision you make for a given year is locked in but you can switch between the two in future years that the vehicle is in use for your business. Standard mileage is easier, but actual expenses may net a higher deduction.

Separate Business and Personal Expenses

There is a lot of paperwork associated with owning a business of your own. When you set up your small business, don’t forget to include a budgeting plan. This budget should include an amount that you pay yourself as the owner of the business. Also be sure to separate business and personal expenses.

With a small business it is easy to mix business and personal expenses. Maybe the business started out as a hobby or a way to make a little extra money on the side. There wasn’t much thought to profit or a permanent enterprise at the time. All of the money funneled into one account.

Then, things began to snowball and soon you were making money hand over fist. As a sole proprietor working for himself, the government categorizes you as “self-employed” for tax purposes. Now that you make well over $400 in a year, you have to pay taxes on your business profit. That one account is going to make things more confusing for you and your tax accountant.

Personal expenses are items that you spend money on for your own use. When you get a paycheck from an employer, that is money that can be used for anything you need. People pay bills, buy groceries, and fund leisure activities.

Business expenses encompass monies used for items or services directly related to the business and its management. Business expenses can be deducted on your tax return if you are self-employed. Personal expenses cannot. If everything is in one account it is hard to separate the two convincingly.

People who conduct their business on the Internet receive electronic payments for many if not all of their services. It is easy and avoids checks or cash getting lost in the mail. Secure servers can be set up to take the payments. Unfortunately, we use this same account to make personal purchases, especially if it is accessed with a debit card of some sort.

Create a budget for your business. Include a salary for yourself. Divide the salary amount into monthly payments and withdraw this amount or transfer it to a personal checking account similar to direct deposit by an employer. Use that account to pay personal expenses like bills, eating out, and allowances for your children.

The business account will record the withdrawal as your monthly salary. Any other expenses that are just for business will be paid for from the business account. In this way, you don’t have to go transaction by transaction and decide which was for business and which was for personal use.

If you already have this issue, go through the account and print a report of all withdrawals. Any that are for personal expenses can be counted as deductions from your salary. Other expenses will be business expenses and can be added up towards a deduction on your tax return. From this point forward, separate the two through monthly salary deduction for easier record keeping.

Limitations on Charitable Deductions

The laws regarding tax deductions for charitable contributions are getting stricter. You can’t give away an old dishwasher and expect to claim hundreds of dollars for it on your tax return. Learn what you can and can’t claim and how the requirements will change in the very near future.

Charitable contributions are cash and non-cash giving that are directed to charities. Most people are familiar with deducting cash contributions to medical foundations and other non-profit organizations. Cash can be deducted for the actual dollar amount given. This includes tithing contributions to your church and other religious organizations.

The problem with charitable donations comes with regards to non-cash donations. Each year people give away clothing, appliances, electronics, computers, artwork and even cars to charity. The amounts that they claim for these items are varied.

While you can’t deduct the purchase price of the items if they are used, claims have been made for amounts that are certainly more than the items were worth at the time of donation. Large donations were not being substantiated with proof of the price. After this year, all of that will change.

For now, if the contributions are in excess of $250 there has to be a receipt received from the charity verifying the amount. For property that is worth more than $5,000 a letter valuing the item is needed from a professional appraiser. The value of vehicles donated is limited to the amount that the charity receives from the sale of the property, not what you paid for it or the blue book value.

The purpose of charitable donations is to give to someone who could use what you no longer can. A good rule of thumb is to only give away items that are in the condition that you would want to receive. People have bundled up items and donated them even if they don’t work or were tattered, and then claimed an almost new price on their tax return for the donation. This will no longer be tolerated.

Items that are given away have to meet certain standards. Clothing must be clean and in condition for wear by another. Appliances, computers, electronics, and the like must be in good working order and not in need of repairs. These items depreciate just like a car. The full price of a new item cannot be claimed for your donation of a computer that you have owned for ten years, for example.

To avoid any problems with your charitable deductions, obtain a receipt for each item that you donate. Specify the name of the item and how old it is. The amount of the deduction is further reduced for anything that has already been subject to a tax break such as business equipment. If you itemize, charitable deductions are limited to less than fifty percent of your adjusted gross income.