In part two of the entrepreneur's version of "Tax Prep 101," we will continue to cover some of the most overlooked tax deductions used by small businesses. Some of these may have already occurred to you, or perhaps your accountant gave you a heads-up early on; but it makes sense to refresh your knowledge from time to time. When it comes to tax preparation, the clear advantage goes to whoever is most organized. In order to stay on top of all these deductions, it makes sense to keep your records up-to-date throughout the year. This means logging purchases, mileage and other business-related expenses, saving receipts and filing them by category.
Below are some other tax deductions that will help reduce your taxable profit.
Software – Generally, software purchased for business use must be depreciated over a 36-month period, but there are some noteworthy exceptions. These include software that was placed into use between January 1, 2003 and December 31, 2013. In this case, the software qualifies for a Section 179 deduction, meaning 100 percent of the cost can be deducted in the same year it was purchased. Also, when software comes with a computer and its cost is not separated out, it is treated as part of the hardware, which is depreciated over five years. However, Section 179 allows the whole computer system to be written off within the first year. A tax professional can explain how to depreciate property for the IRS.
Charitable Contributions – If your business is an LLC, a partnership or an S corporation, you may make charitable contributions as a company and claim it on your individual tax return. However, if you own a regular corporation, the company can deduct the charitable contributions. Keep in mind that while you can usually deduct old office equipment on your taxes, you cannot claim it if the equipment has been fully depreciated in prior years.
Taxes – When your business pays taxes during the general course of doing business, they can be deducted in a few different ways. Sales tax on items you buy for day-to-day operations is deductible along with the cost of the items; not as a separate line item. However, a larger business asset like a car would be treated differently, based on the cost of the car, meaning it would not be entirely deductible in the year it was purchased.
Employment taxes - If your business pays employment taxes, the employer's share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn't a business expense.
Remember, federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, but not as a business expense.
Real estate tax on property used for business is deductible, as well as any local assessments for repairs or maintenance. If the assessment is for an improvement -- for example, to build a sidewalk -- it isn't immediately deductible; instead, it is deducted over a period of years. An accountant or tax professional can help you understand how these longer-deductions are calculated.