Being a small business owner is hard work. Luckily, tax deductions for small business owners can give you a boost if you learn how to use them.
Here are some of the most profitable, and often over-looked tax deductions for small business owners.
Did you know you can deduct your sales tax or state income tax from your federal income tax return? If you live in Wyoming, Washington, Texas, South Dakota, Nevada, Florida, or Alaska this can save you big bucks. Even if you already paid state taxes, a sales tax deduction may lower your taxes if you had a big purchase, like a car. You will still need to itemize this deduction, but the IRS has a helpful table to guide you through the process.
This is of the most popular tax deductions for small business owners. If you work from home, you may be able to take a home office deduction to reduce your taxes. The expenses might include your mortgage interest, utilities, repairs and even insurance.However, you must be able to prove you actually use the space you are deducting as a regular part of your business. It’s important you don’t take too much of a deduction, so always work with your CPA to determine the correct amount.
There are two ways to take the home office deduction: the regular method or the simplified method.
Regular Method: you calculate the actual expenses for your home office. You must also determine what percentage (of your total square foot) that your home office includes. Once you have that percentage, multiply it by your expenses. As an example, if your home office takes up 6% of your home’s square feet, you could claim 6% of your mortgage interest, utility bills, repairs, etc.
If you have a small home office (less than 300 square fee), the simplified method for taking the deduction may be easier. With the simplified method, multiply your home office square fee by $5 per square foot (the IRS standard rate). With a home office of 300 square feet, you can take a $1,500 deduction ($5 x 300).
Social Security (if you are self-employed)
As a business owner, you have to pay both the employer and employee portion of social security and MediCare. Employees pay 7.65% to cover Social Security and Medicare taxes and their employer pays the other 7.65%. That can add up to 15.3 percent of your income. However, you can deduct the employer portion from your income tax. You’ll note the self-employment tax on Line 57 of Form 1040. You will need to fill out and attach Schedule SE to claim this deduction.
Health Insurance Premiums
With rising health insurance costs, premiums can really eat into your bottom line. When you’re the business owner, the buck stops with you. Making sure you’re covered is a big responsibility and can be a big cost, too. Because you’re self-employed and responsible for your own health insurance coverage, you may be able to deduct up to 100% of your premiums. This amount gets taken off of your adjusted gross income, not as an itemized deduction, but can still make a big difference in your out of pocket tax payment. Make sure to report your self-employee health deduction on Line 29 of your Form 1040. If you’re paying for health insurance, this tax deduction for small business owners can be very powerful.
One of the most important investments you can ever make is in yourself. Part of investing in yourself and growing as a business owner means the learning never stops. Fortunately, you can often deduct these educational expenses from your tax return. The Lifetime Learning credit can be up to $2,000 per year. This is 20% off the first $10,000 you spend on education, including coaching, continuing education, and other ways to provide more value as a business owner. The tax deduction for small business owners phases out at higher income levels. However, there is no age limit and you can take the Lifetime Learning credit throughout your entire life. The biggest lesson here: always keep learning!
Solo 401k Contributions
The Solo 401k plan is a Qualified Retirement Plan, also known as a Profit Sharing Plan. Just like a regular 401k, you can make tax deductible contributions from the money you earn into the retirement plan. The IRS wants to reward Americans for saving towards retirement, so these contributions can be tax deductible. With a typical corporate 401k plan, you can generally max out at about $18,500 per year (or $24,000 per year if you are age 50 or older). Depending on the company, the employer may match contributions up to a certain percentage.
Because you are both the employee and employer of the Solo 401k plan, your tax-deductible contributions can really be supercharged. With the Solo 401k, you can make a tax-deductible contribution of up to $55,00o per year, or $61,000 if you are age 50 or older. If your spouse participates in the Solo 401k plan with you, double that contribution amount. That’s a tax-deductible contribution of up to $122,000 per year. This is perhaps one of the most powerful tax deductions for a small business owner because of the amount you are able to contribute, lowering your taxable income.
By planning your tax deductions, you can save a significant amount of money, all while being compliant. Running your own business is an incredible feat and the IRS will try to help out wherever they can.Being smart about your tax deductions puts more money into your pocket. This means you can invest more in yourself and growing your business.
By knowing what you can compliantly deduct, you can save money paid to the tax man. This in turn leaves you more money to live your life and focus on making your business the best it can be!