With tax season upon us, one can easily become a little overwhelmed by all the tax rules, new changes, credits and deductions. Things are doubly confusing if you’re a small business owner, as you have many more items to keep track of. So, what are the top small business tax deductions you should be takingon your 2009 tax return? Read below to learn more.
You can deduct the expenses of running your business off your taxes (see below for more), but nothing can be deducted before you open for business. You can only deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of business. Expenses that are not deducted can be amortized over a 180 month period, which begins when you open your business. These expenses include market research, advertising, employee training, business travel and other costs.
You can deduct your mileage, parking fees and tolls for the business use of your car. A lot of business owners will merely take the standard mileage rate deduction (55 cents per mile for 2009, which will decrease to 50 cents for 2010) because it’s easier to keep track of your mileage records, but you could actually get a larger deduction if you keep track of everything, including repairs, maintenance and insurance. Also, if your car is fairly new, you can also deduct the depreciation on the vehicle if you tally up all the actual expenses. Make sure to report your mileage for each trip. You can only deduct the business portion of your auto expenses if your car is used for both business and pleasure, so keep track of the usage accurately.
Equipment and Furniture
Some small businesses can deduct the full cost of equipment the year they purchased them, rather than capitalizing them—that is, deducting their cost over a number of years. According to the IRS, you can deduct up to $250,000 of the cost of new equipment on your 2009 tax return. Some assets don’t qualify, such as real estate or property bought from a relative. For this year, there is also a first-year bonus depreciation deduction that allows taxpayers to depreciate 50% of the adjusted basis of qualified property during the first year the property is used.
Advertising and Promotion
The cost of advertising, including business cards, Yellow Page ads, commercials, etc. is deductible on your 2009 tax return. Promotional costs that create business goodwill, such as sponsoring a little league baseball team, are also deductible as long as there is a definite connection between the sponsorship and your business. This would include naming the team after your business or including your logo on their jerseys.
You can deduct educational expenses only if they are related to your current business or occupation. The expense can only be deducted if you are furthering your education to maintain or improve skills required for your job.
If you used credit to finance business purchases, the interest is fully deductible. This also goes for the interest taken on a personal loan. You just need to make sure you conform to the IRS’ rules if you borrowed money from a relative or a friend. Also, you must prove that the money borrowed was only used for your business.
When travelling for business, you can deduct the cost of the airfare, costs of operating your car, taxis, lodging meals, telephone calls and more. You must have records for all of these expenses. If you’re combining business and pleasure, you can only deduct these expenses if business was the primary purpose of your trip. You cannot deduct the expenses of taking your spouse or your family on your trip, however.
The IRS will approve the deduction of up to 50% of entertainment expenses for your business, but you must follow these rules: it must be directly related to the business and business must be discussed (such as a meal catered to the office), or it must be associated with the business and the entertainment occurs directly before or after a business discussion. Make sure when you’re keeping records to make note of the business purpose of these entertainment outings.
Professional and legal fees are deductible, but if the costs are part of your start-up expenses, you may need to amortize the cost over 60 months.
If your business is a partnership or a limited liability company, your business can make a charitable contribution and pass the deduction to you to claim on your individual tax return. If you own a corporation, the corporation can deduct the charitable contributions on the company’s taxes.