Small Business Tax Deduction Strategies: 13 tips on Section 179 depreciation, home office write-offs for the self-employed, tax deductions for business vehicles, rental property depreciation and real estate capital gains tax
Savvy small business owners take a proactive approach to seizing all the business tax deductions they’re legally entitled to under current tax law. Don’t add to your tax bill by overlooking crucial write-offs.
Small Business Tax Deduction Strategies lays out 13 shrewd tax-planning moves you can make to reap the biggest tax savings. Learn how recent tax law changes affect the Section 179 deduction and bonus depreciation, and how to maximize home office write-offs, tax deductions for business vehicles and business travel, and tax shelters in investment property.
Small Business Tax Deduction Strategies #1
Section 179 depreciation: Tap into major tax savings
Over the past few years, Congress has enacted extremely favorable rules that expand first-year depreciation write-offs for small businesses.
For most small businesses, the best tax law change in recent years is the huge increase in the Section 179 first-year depreciation allowance. A business can immediately deduct 100% of the cost of most new and used business personal property.
The maximum Section 179 was gradually increased from $25,000 to $250,000 for 2009. Then the Small Business Jobs Act of 2010 doubled this amount to $500,000 for 2010. Under the 2010 Tax Relief Act, the maximum deduction was set at $125,000 (subject to inflation indexing). But after 2012, the allowance was scheduled to revert to $25,000. But then, the American Taxpayer Relief Act of 2012 (ATRA) came to the rescue. It preserved the maximum $500,000 deduction for two years, retroactive to Jan. 1, 2012, and through Dec. 31, 2013.
Small Business Tax Deduction Strategies #2
Claim bonus depreciation for qualified assets
In addition to the enhanced Section 179 deduction, a business may claim “bonus depreciation” for qualified assets placed in service during the year. This tax break applies to:
Small Business Tax Deduction Strategies #3
Section 179 depreciation: 4 ways to trigger quicker write-offs
You can maximize the Section 179 expensing deduction with some shrewd tax planning. Here are four ways to get more bang for your buck:
1. Put the company in the black. The tax law limits your annual deduction to the amount of your taxable income. If your company typically zeroes out its taxable income through compensation payments, give yourself some leeway to claim the allowance.
2. Boost your business income limit. Don’t forget that your business income includes all income from businesses in which you actively participate. If you pull down a salary, either part time or full time, in addition to running a business, the extra income increases the amount of the allowance.
3. “Log in when you log on.” If you’re claiming the allowance for assets used partially for non-business reasons, maximize the business percentage. Suppose you buy a PC to work at home, but your kids also use it to instant-message their friends. If you use the computer 90% for business, you can deduct that percentage of the cost under Section 179. If the business use drops below 50%, you can’t claim the allowance.
4. “Gentlemen (and ladies), start your engines.” You can claim the Section 179 allowance only for the year that equipment is “placed in service.” You get no deduction for 2013 if you buy a machine in 2013 but don’t take it out of the box until 2014.
Small Business Tax Deduction Strategies #4
Section 179: Bigger deductions for ‘heavy’ SUVs
If you choose to deduct actual expenses rather than use the standard mileage allowance, you should be aware of a potentially huge tax advantage for owning “heavy” SUVs, vans and pickups. As long as these vehicles have a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds, they’re considered “trucks” for tax purposes.
When these “heavy” vehicles are used more than 50% for business, they can be depreciated much more rapidly than other passenger vehicles.
Small Business Tax Deduction Strategies #5
Business vehicles: Fuel tax deductions for business driving
You can deduct auto expenses using a standard mileage rate, which the IRS sets each year. For 2013, the standard mileage rate for business drivers is 56.5 cents per mile, up from 55.5 cents per mile in 2012.
With the standard mileage rate, you don’t have to account for the actual expenses incurred. But you can probably do better.
Small Business Tax Deduction Strategies #6
Deductions for business vehicles: Tax-free cars for the family
The cost of operating and maintaining a car used for business purposes, including depreciation, is deductible. If you own a business, the firm can provide cars for the entire family.
As long as they’re employees who use the cars exclusively for business purposes, the company can deduct the entire cost of operating them. Deductible car expenses include the cost of gasoline, oil, repairs, insurance, depreciation, interest on loans used to purchase the car, taxes, licenses, garage rents, parking fees and tolls.
Small Business Tax Deduction Strategies #7
Self-employed tax deductions: Write off home computer, furniture
Many self-employed taxpayers can deduct equipment purchases, rather than capitalizing them, under Section 179 of the tax code. The Section 179 deduction applies to most business assets, including home office computers and furniture.
For example, if you spend $25,000 on such items and they’re used strictly for business, you can take an immediate $25,000 deduction. If those items were used 60% for business, you can take a $15,000 deduction.
Small Business Tax Deduction Strategies #8
Should you own or rent your business premises?
Once your company’s profits begin growing and your business stabilizes, you might want to consider owning your quarters rather than renting.
To evaluate the comparative costs, consider a reasonable length of time, such as 10 years. Include in your calculations the purchase price of a desirable building at the location you want. You can depreciate the cost of the building (“improvements”) but not the cost of the land. Add together the cost of financing 100% of your purchase price at the prevailing interest rate, maintenance costs, straight-line depreciation and property taxes. The total of these items is your “rent equivalent.”
Compare this cost figure with your projected rental costs for 10 years and factor in expected rent increases (4% per year is realistic). Don’t overlook your company’s future expansion needs. Whether you buy or rent, you must be able to expand or contract space as needed. If you plan to own your space, you may want to consider buying a larger building and renting out part of your space on a short-term basis.
Small Business Tax Deduction Strategies #9
Shelter up to $25,000 per year in investment property
Real estate prices are down in many areas of the country, so some excellent buying opportunities are out there. In addition, investors still have some real estate tax shelters:
Directly owned real estate
From a house or condo that you rent out to a shopping center that you own with a few associates, you can find tax shelter in investment property. However, you must clear a row of obstacles before you can take deductions.
You must own at least 10% of the property, and you generally can’t own the property through a limited partnership interest. Also, you have to “actively manage” the property. That doesn’t mean you have to replace faulty fuses or switches. You can hire a property manager and a rental agent, but you must participate in management decisions, such as tenant selection and capital improvements, and must keep records to show your participation.
More obstacles relate to your income. Say your adjusted gross income is lower than $100,000 per year; you can deduct up to $25,000 worth of losses per year. However, if your AGI is more than $100,000, the allowable deduction declines to zero at $150,000.
You can earn a 10% tax credit for fixing up old buildings, 20% if the building is “historic.” The income limits here are less restrictive. As long as your AGI is below $200,000, you’re entitled to credits as great as a $25,000 “deduction equivalent.”
Small Business Tax Deduction Strategies #10
Rental property: Turn your child’s college lodging into a tax shelter
Let’s assume you have a child in college who wants to live off campus, and at the same time you could be looking to buy real estate to shelter your income. Here’s how to kill two birds with one stone:
Strategy: Buy real estate property near the school, and rent a unit to your child. For your child, this provides reliable off-campus housing. For you, it’s a tax shelter that will probably appreciate in value.
When you eventually sell the property, any long-term gain will be favorably taxed at the long-term capital gains rate, currently 15% in 2013 (20% for single filers with incomes above $400,000 and joint filers with incomes above $450,000). The maximum federal rate on gain attributable to depreciation deductions is 25%.
Small Business Tax Deduction Strategies #11
Self-employed tax deductions: your home office
While some view the home office deduction as audit bait, you’ll withstand any IRS scrutiny if you know and follow the home office deduction rules.
Here’s how to earn bigger and better deductions without getting off the living room couch.
Home office rules: the basicsWhether you’re a butcher, a baker or a candlestick maker, you can deduct your home office expenses if you use part of your home “regularly and exclusively” as either:
Small Business Tax Deduction Strategies #12
Can’t sell your home? Turn it into rental property
The real estate slump is still hurting many home sellers. To make matters worse, you can’t deduct a loss from the sale of your principal residence.
Strategy: Turn your home into a rental property. Hold it out for rent while you relocate. Then you can deduct a loss when you sell the place. This tax move takes advantage of a key distinction for investment or business property.
Small Business Tax Deduction Strategies #13
Self-employed tax deductions on business travel
So long as the “primary reason” for a trip is business-related, a sole proprietor, partner or LLC member can write off 100% of the transportation costs within the United States. But if a vacation is your primary motivation, you can’t deduct a dime.
Strategy: Mix a few vacation days into your business trips. That way, you can deduct all transportation costs, including airfare, travel to and from airports, cab fare between lodgings and business meetings, etc.—with the IRS’s blessing.