It's that time again! No, not the end of tax season, it's National Mom and Pop Business Owners Day! March 29 celebrates the more than 27 million hard working people creating almost 70 percent of all new jobs in the country. Small businesses create economic growth and have done so since the nation began.
If you're one of these 27 million, you're probably aware of the many tax benefits available to you. But let's take a look at some of the most overlooked ones.
Qualified Joint Venture (QJV) - Many businesses are owned by a husband and wife team and for many years the IRS required even spouse-owned businesses to file as a partnership. Since 2007, the tax rules have been set up to allow legally married couples who jointly own a business to elect to file separate Schedule C's including the appropriate share of the income and expenses. This option is available for couples who are the only owners of a business and who file a joint return. Both taxpayers pay the Self-Employment taxes, Social Security and Medicare taxes, on their share of the profit. Using the QJV, both taxpayers are protected under Social Security because each one is paying into the trust fund and the taxpayers have a more simplified tax filing than other types of small business partnerships.
Home Office Deduction - Many small business owners only have an office in their home where they set aside space to take care of all the finances, ordering, appointment setting, and paperwork associated with their business. This can be a great deduction if just a few simple rules are followed. The area used for the business must be exclusive to the business, meaning you can't also use the space as an extra bedroom for occasional guests or use it to double as a TV or game room for children or company. Taxpayers must determine the total amount of square feet in the home and the size of the area used for business. The percentage of business use, the area used for business, of the home is used to determine the amount of indirectly associated expenses such as real estate taxes and mortgage interest or rent, utilities, and maintenance of the whole home allowed as a deduction. In addition, taxpayers can claim any expenses directly associated with the office such as remodeling the room to provide an entrance to the outside of the house. These expenses and depreciation for the office area are allowed as a deduction against business income. When the potential deduction is greater than the net profit of the business, the deduction is limited to the available net profit. Beginning this year, the IRS offers taxpayers a choice between the traditional, more complex home office deduction method or a new simpler deduction method.
Depreciation and Section 179 Expense - The tax code does not allow businesses to deduct the cost of assets purchased for the business as an expense. Instead, taxpayers are permitted to deduct the cost of assets purchased and used for the business over a pre-determined number of years. In addition to determining the number of years an asset is expected to be useful, the tax code also determines the percentage of the asset that can be claimed each year. This is called depreciation and is certainly one of the most confusing aspects of taxes for a business. And while you can't claim the cost of the item as a deduction in the year you purchase it, you can claim a section 179 deduction. The section 179 deduction is similar to an accelerated form of depreciation because it permits the taxpayer to claim the full cost of the asset the first year it used in the business. Of course, there are many regulations governing the Section 179 deduction and depreciation and taxpayers in this situation should talk to a local tax professional.
Travel Expenses - While most businesses track the miles they spend going to a jobsite from the office, many taxpayers forget to claim the cents per mile for the miles driven while running errands for the business. Those stops at the post office, office supply store, or even running your employees to various places are all deductible at 56.5 cents per mile. The only requirement is you must keep a log of your miles driven. I suggest you put it in your calendar, phone, computer, or tablet.
Nothing is more noble or rewarding that owning your own business and creating value for yourself and all of the others that are a part of your operation. It's neither easy nor without risk nor without ever-growing competition. Therefore it is critical that you take every advantage that you can and use every best practice known. An easy one is to use the tax code to claim every tax break, tax deduction and tax benefit you are due. These are just a few of the often overlooked deductions for a small business. If you are one of the small businesses in the U.S. make sure you are getting the most out of your tax return.