The biggest complaint about accountants is that they are more reactive than proactive, according to the 2015 Small Business Accounting Report. About 71% of small businesses outsource their tax work to accountants. As such, small business owners need to understand basic tax principles and rules so that they can push their accountants to be more proactive. In addition, business owners need to prepare their own financial records and statements.
Accordingly, make sure you gather your receipts, invoices, canceled checks, online payments and automatic deductions. Don’t forget business records and any other papers that prove deductions. You can deduct ordinary (common in your trade) and necessary (appropriate for your trade) for expenses paid or incurred running your business. These include:
Travel and Auto Expenses. The standard method is that you can deduct 54 cents per mile (down from 57.5 centers in 2015) for business travel plus parking and toll expenses. The actual method is to add up all automobile expenses – including gas, repairs, oil change, car insurance, car washes, etc. – and then multiply it by your business percentage. Your commute from home to work is not deductible. But traveling to and from a client’s location is deductible.
Health Care Tax Credit. You’re eligible for this credit if you have fewer than 25 full-time equivalent employees, pay an average wage of less than $50,000 a year, and pay at least half of your employee’s health insurance premiums. You must also have purchased coverage through the small business health options program, also known as the SHOP marketplace. If you qualify, use Form 8941 to calculate your deduction.
Home Office Usage. Consider using the simplified deduction method, which is $5 per square feet of area used exclusively for business (300 square feet is the maximum allowed). The standard method requires you to keep track of utilities, maintenance, mortgage interest or rent and deduct the business percentage (total square footage of home divided by square footage of office) on your Schedule C.
Startup costs. You can deduct costs you incurred before setting shop, such as expenses to explore business opportunities, may entitle you to a deduction in your first year of business. You can deduct up to $5,000 of the startup costs you incurred before you began operations in your first year of business.
Qualified equipment and software. Section 179 and bonus depreciation have both been extended for 2016. Section 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased (up to $500,000) rather than depreciating it over the life of the asset. Bonus depreciation allows business owners to depreciate 50% of the cost of new equipment purchased in 2015.
Phone and data bills. You can claim the business use of your cell phone as a tax deduction. If 30% of your time on the phone is spent on business, you could legitimately deduct 30% of your phone bill. What’s more, your computer, Internet service, software and even some tech gadgetry are deductions if you must use them to run your business. Say, you use you iPad a lot when traveling for business.