Business Tax Deductions You Should Consider
The poet Robert Burns once said, “There is no such uncertainty as a sure thing.”
That sentiment rings true for small businesses throughout the U.S. as the dust of the 2016 presidential election settles and tax season approaches.
During the campaign, President Trump focused on growing the economy by leveling the playing field, reducing regulations, repealing the Affordable Care Act and lowering taxes for businesses. While the rhetoric was music to the ears of many small business owners, others pointed to Trump’s lack of specifics as the reason for caution.
In a January 18th USA Today article, writer Rhonda Abrams pointed out that Trump’s plan to reduce the corporate tax rate would likely only apply to “C” corporations. And she points out that “eliminating loopholes” could translate to a loss of deductions that many small business owners routinely take – like carrying forward business losses, claiming the use of your car or truck for business use and incentives for investors to fund new ventures.
The truth is it will take months, if not years, and the cooperation of Congress for such sweeping changes to take place.
In the meantime, here are 5 business tax deductions you should consider.
Tax Deductions for Interest Paid on Business Loans
You may deduct interest on small business loans, but keep in mind that the deduction can only be taken if the funds are used for business purposes. Although interest paid on loans from friends and relatives is deductible, the IRS tends to look at these with a greater scrutiny. Attorney and author Stephen Fishman warns, “You need to carefully document these transactions. Treat the loan like any other business loan: Sign a promissory note, pay a reasonable rate of interest, and follow a repayment schedule. Keep your canceled loan payment checks to prove you really paid the interest.”
In addition to conventional bank loans, factoring fees are also generally considered a business expense and are therefore deductible. You should discuss your particular situation with the factoring company and your tax professional to make sure your situation conforms with IRS requirements.
Deductions for Business Travel
You should deduct your business travel costs and save your airline miles for personal use. In a recent Investopedia article, writer Marc Prosser points out that “Business owners often rack up points on their miles card and figure that they can reduce business travel costs by using their miles for business flights. However, if they also fly fairly frequently for personal trips, this is a mistake. Business travel costs are fully deductible as a business expense; personal travel costs are obviously not.”
Deductions for Maintenance and Repairs
Tax deductions are available for the cost of routine maintenance and repairs to the business property. However, improvements that add to your property’s value must be capitalized and depreciated. Tax Consultant William Perez uses the example of changing the oil in a car. According to Perez, “Changing the oil keeps the car operating normally and efficiently, but it doesn’t substantially prolong the useful life of the car. Replacing the transmission or engine, however, would substantially prolong the useful life of the car, and so this would be more like a repair that needs to be capitalized.”
Tax Deductions for Wages Paid to Independent Contractors
If your business employs independent contractors to meet your labor needs, you may deduct that cost. Just be sure to provide any contractor who receives $600 or more in wages with Form 1099-MISC.
You should also be sure that independent contractors you employ meet the requirements outlined by the IRS. Claiming an employee as an independent contractor can have a number of costly legal consequences for your business, including:
- Reimbursement of wages you should’ve paid them under the Fair Labor Standards Act, including overtime and minimum wage
- Payment of back taxes and penalties for federal and state income taxes, Social Security, Medicare, and unemployment
- Payment of workers’ compensation benefits to any employee misclassified as an independent contractor
- Providing employee benefits, including health insurance, retirement, etc.
Tax Deductions for Employee Education and Tuition
Employee education assistance is deductible provided you set up a qualified educational assistance program that adheres to IRS regulations. The IRS currently allows businesses to deduct up to $5,250 for tuition reimbursement for employees.
In a recent article published on www.thebalance.com, writer Jean Murray points out, “Independent contractors working for your business can be treated as employees for the purpose of this benefit. That means they may also exclude allowable education to benefit expense payments from income. Their income would be reported on Form 1099-MISC.”
Before claiming any of these deductions, you should refer to IRS publications and discuss them with your tax professional or employee benefits consultant.
Obviously, this article covered just a handful of the deductions small businesses can take. Are there others that you think our readers would find helpful? If so, please share them by posting a comment below.
By Jack Stieber – President – American Receivable