Small Business Tax Deduction Strategies: 13 tips on achieving write-offs through donations, retirement plans, IRA transactions, home sales, business equipment and trusts
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.
Small Business Tax Deduction Strategies #1
Navigate the bargain sale rules to get a writeoff
Do you own a boat or a car you might donate to charity? Before you pull the trigger, consider another option. When possible, arrange a “bargain sale” to a qualified charitable organization. By combining a sale and donation, you get cash back from the charity, plus a write-off based on the property’s fair market value.
Small Business Tax Deduction Strategies #2
Get credit for starting a retirement plan
If you recently acquired or started a new business, or if it took several years for your company to become profitable, you may be ready to put more money into employee benefit plans like a qualified retirement plan. Get your retirement plan going before the end of the business tax year. This will entitle your business to a tax credit—a dollar-for-dollar reduction of the company’s tax bill—for plan startup costs.
Small Business Tax Deduction Strategies #3
Don't overindulge on business meals
The days of the three-martini lunch are long gone, but business people can still deduct meal expenses that meet certain requirements. Don’t try to circumvent the rules. The IRS is a stickler when it comes to claiming and proving entertainment and meal deductions. In particular, the IRS won’t allow you to simply reciprocate expenses with business associates so that you can each claim multiple deductions.
Small Business Tax Deduction Strategies #4
Donating property? Keep good recordsThis point can’t be emphasized enough: You must keep the detailed records required by the tax law to back up claims for charitable donations of property.
Small Business Tax Deduction Strategies #5
Cash in on home sale bonanzaWould you pass up a chance to pocket a half million dollars in tax-free profits? Not likely. Keep records to protect the generous home sale exclusion. When you sell the place, most or all of the home’s appreciation in value may be exempt from the federal capital gains tax, if you qualify.
Small Business Tax Deduction Strategies #6
Get more tax mileage from car donation
You may often hear ads on radio and TV touting top-dollar deductions for donating a used car or other vehicle to charity. But it’s not always as simple as it sounds. Specify that the charity must use your vehicle in furtherance of its tax-exempt purpose. As a result, you can deduct an amount equal to the vehicle’s fair market value (FMV), subject to all the usual limits and restrictions on deductions for charitable donations.
Small Business Tax Deduction Strategies #7
Steer clear of prohibited IRA transactionsTo paraphrase John F. Kennedy, it’s not what you do in your IRA, it’s what you can’t do. Don’t engage in any “prohibited transactions.” The penalties can effectively wipe out the benefits you received from your IRA in the first place. Other rules limit the type of investments you can make with IRA funds.
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
Turn personal interest into tax deductionsAre you paying interest on a personal loan or credit card charges? Generally, you can’t derive any tax benefits from the interest on these loans. It’s considered a personal expense and is therefore nondeductible. When appropriate, consolidate debts under a home equity loan. As a result, the interest you pay on the loan may be deductible within relatively generous limits.
Small Business Tax Deduction Strategies #10
When to lease, not buy, equipment
Consider leasing business equipment instead of buying it. Generally, you can write off the entire cost of leasing without a huge upfront commitment. Also, leasing isn’t forever. If the tax breaks for buying property are revived, you may be able to quickly cash in.
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
Gain more control over S corp lossesIf you operate a business as an S corp, you may be able to claim a valuable tax loss against your other income. But the tax law generally limits such losses to the amount of your basis in the stock, plus any outstanding loans made directly from you to the corporation. Arrange a capital contribution or loan to the S corp. You’ll increase your adjusted basis and give yourself “breathing room” to absorb losses passed through by the corporation to you.
Small Business Tax Deduction Strategies #13
Spawn a dynasty trust across generations
It has probably taken you a number of years to build up your small business empire. But now that you’re closing in on retirement, you’d like to preserve most of your assets for your family without paying an arm and a leg in taxes. Set up a “dynasty trust.” Unlike a typical trust that lasts for a limited term or ends upon a specified event, a dynasty trust may span several generations without triggering adverse tax consequences.