Building Wealth with Business Tax Deductions
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Before you get too jealous of your small business buddy who just bought (another) new car, consider taking a closer look at your business tax deductions. It could very well be that your friend isn’t running her business any better than you are. Her quarterly profits could even pale in comparison to yours. So what’s the thing that’s making so many exotic vacations and Aston Martins possible? You friend has learned how to make her business tax deductions work for her.
According to Nolo.com, “the more tax deductionsyour business can legitimately take, the lower its taxable profit will be.” And the lower your taxable profit, the more money – and benefits – you can accrue at the end of the year. While most small business owners and solopreneurs think of tax deductions in terms of saving some scratch and paying less on their taxes, there are actually a lot of perks available to those who know how to play by Uncle Sam’s rules.
Driving something snazzy for a portion of the cost sound appealing? How about combining a business trip with a personal vacation? Make sure the following deductions are ready and waiting in your small business arsenal:
1. Getting Up and Running
There is so much to think about the first year you’re in business. While you’re tearing your hair out obsessing about marketing and trying to figure out Adwords, don’t forget to take advantage of the big tax breaks available to newbie SMBs.
Generally speaking, if your startup costs were less than $50,000, you can deduct $5,000 in business expenses from this year’s tax return. While that may not seem like a ton of cash when compared with $50,000, it’s still a) free money back in your pocket, and b) kind of a lot if your startup costs were, say, $10,000.
There are two “ifs” to this awesome deduction: IF you started your business before 2004, different rules apply, and IF you started your business in 2010, you may be able to deduct a whopping $10,000 in startup costs! For specifics on YOUR tax situation, double check these numbers at IRS.gov.
2. A Little Help, Here?
You know how a lot of people make money online by teaching other people to make money online? Or how Education professors teach teachers how to teach? Well, this next deduction is sort of like that.
You can deduct business taxes by hiring someone to help you deduct your business taxes. Isn’t that fun?
When you hire an accountant, consultant, or tax professional, those expenses are up to 100% deductible. Just make sure you’re counting the specific tax year you’re filing for only; in other words, you can’t deduct what you pay your tax guy in 2013 on your 2012 return. You can, however, deduct what you paid him or her in 2012 when they were working on your 2011 return.
3. Sometimes it’s better to work with your hands
There are about a gazillion and a half different types of small businesses out there, but Uncle Sam divides them all into two groups: those businesses that sell goods, and those that sell services. Maybe there are simply more service-type businesses than goods-type businesses, but this is one key area where the goods-makers are favored by the IRS.
If you sell Awesomely Delicious Cookies, for example, and you ship a box of said cookies off to some greedy jerk customer who stiffs you and refuses to pay, the IRS says you can deduct the cost of making and shipping those cookies. If, however, you happen to provide life coaching services, and a greedy jerk customer refuses to pay, you cannot deduct the time wasted on Mr. Stiffster.
Something to consider if you’re trying to decide between making cookies and life coaching.
And what about business tax deductions on vacation? As long as your main reason for the vacay is business, you can bring your entire family along, and deduct your own expenses for the entire trip. Including that sweet Aston Martin rental car.