What are some overlooked tax incentives for small businesses?
Throughout the United States, small businesses are thriving. These companies are producing game-changing innovations and sparking new ideas. But, like their counterparts at large companies, owners of small businesses need to be aware of tax implications affecting their businesses and of tax-saving benefits they can take advantage of.
There are many such tax-saving incentives aimed at small businesses. Here are several key incentives that small business owners may not be aware of, or have possibly overlooked, that benefit their enterprises.
01. HEALTH INSURANCE PREMIUMS
Health insurance premiums for you, your spouse and dependents (under age 27) are 100 percent deductible if you are self-employed. One thing to remember is that this is not a business deduction but rather a personal deduction that is reflected on an individual’s tax return.
02. SIMPLIFIED EMPLOYEE PENSION IRA (SEP)
Self-employed individuals may contribute as much as 25 percent of their net earnings, up to $53,000 (for 2015 and 2016). The money stays sheltered from taxes until these individuals take distributions. One unique feature of an SEP is that you don’t have to actually fund the plan until you file your taxes. This is advantageous, in the sense that if you have more income than you expected, you can make a larger contribution, which in effect will lower your tax bill. On the flip side, if you have had a tough year and need the liquidity, you can cut back on your contribution.
As a small business owner, you have the ability to manage your taxable income, so that you end up in a more favorable tax bracket.
03. PURCHASE OF A NEW ASSET
Some businesses can write off 100 percent of the cost of an asset in the year it is purchased, as opposed to capitalizing the cost. Under Section 179 of the Internal Revenue Code, you can deduct the cost of equipment and business assets you purchased and placed into service that year. However, the amount deducted is limited, based on a maximum threshold amount, which can change and is dependent on the tax law at that time.
04. MANAGE YOUR TAXABLE INCOME
As a small business owner, you have the ability to manage your taxable income, so that you end up in a more favorable tax bracket. For instance, if at the end of the business year, you realize you are going to be in the highest tax bracket, you can purchase needed equipment in the same tax year and take advantage of that deduction, as explained above, as opposed to waiting until the following tax year.
05. START-UP COSTS
Business owners do not often realize that the expenses they incurred before operating as a business may be deducted once the business is up and running. Examples of startup costs might include attorney fees, accounting feesor expenses to explore business opportunities. These deductions can be taken once the business starts earning revenue. There is an election to deduct up to $5,000 the first year. The balance must be amortized over 15 years.
06. LUNCH AND/OR DINNER MEETINGS ARE 50 PERCENT DEDUCTIBLE
As long as the business meals are reasonable, you are allowed to deduct 50 percent of meal costs when you eat with business partners and employees, while conducting business operations.
07. CHARITABLE CONTRIBUTIONS
If your business is set up as a partnership, LLC or S-Corp, it can make charitable contributions and pass the deductions down to you, allowing you to claim the charitable contributions on your personal tax return. This is adouble benefit: The business garners goodwill from the donation while the business owner gets the deduction on his/her personal tax returns.
A tax advisor can help you evaluate your specific business needs and determine potential tax-saving strategies to help you manage your business.
This article is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to beused and cannot be used to avoid penalties under the Internal Revenue Code, or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.