Small business owners face different financial challenges than those working for an employer. There’s no guaranteed income or paycheck, you need to pony up to pay for your own health insurance, and generating the seed money to start—and then continue to expand—a business can be very difficult.
Fortunately, in recognition of these added risks, the government has designated tax benefits for small businesses. In particular, small business owners are eligible to take advantage of several tax deductions—but without careful planning, these benefits may get overlooked.
Why is it important to plan ahead for these deductions when tax time comes but once a year? The answer is that if you fail to properly document your expenses in the months prior to filing, you might miss out on the opportunity to save significant sums.
According to our research, taxes are a big concern for small business owners across the country. Check out the following five tax benefits for small business owners that you’ll want to take advantage of every year—and do what it takes today so that you can seamlessly claim the deductions to which you’re entitled come April.
Office supplies and equipment are tax write-offs
Yes, it costs more on the front end to start your own business. But document your expenses carefully all year long and hang onto your receipts to prove your purchases. By doing so, you can then deduct certain business-related items from your taxable business income.
This includes your office supplies, office furniture, software used for your business, subscription costs for industry publications, and office equipment like computers, printers, and fax machines.
Your health insurance premiums are tax-deductible
Funding your own health insurance as a small business owner can be pricey, and doubly so if you’re paying for your spouse as well. But keep in mind that if you sign up for medical insurance, the premiums are 100 percent tax deductible.
If your spouse worked for you during the year (meaning actually doing a job you can document, not just in name only), then the full amount of the healthcare coverage for premiums will be deductible on your business’s tax return. In fact, if you have children who were covered by your spouse’s policy as dependents, those costs are also deductible.
You can get a tax break on your home office space
While many small business owners fail to take advantage of this benefit, you are entitled to deduct your home office from your business income. However, there are some caveats here that you should plan for during the year to ensure you can prove that you’re entitled to the write-off. The caveats are that you must be able to document that you’re:
- Using the designated office as your principal place of business
- Using the space only for business-related matters, with no blurring of personal uses
To show this, be ready to produce evidence that can emphasize your office is only used for your business. Your office can’t double as the family room, or your work computer as a repository for your children’s photos.
Don’t forget to deduct start-up costs
American Express lists start-up costs as one of the most overlooked tax deductions for small businesses. It’s easy to see why entrepreneurs might forget to include this important benefit on their tax return, since it refers to business expenses that occurred prior to launching your venture. Yet according to the IRS, you can deduct up to $5,000 of the start-up costs that you incurred before you opened the doors to customers in the first year of business.
What happens if your start-up expenses were higher than $5K? You still may have some options:
- If the costs are under $50K, you can amortize them ratably over a 15-year period.
- If the costs are over $50K, limitations do apply—but even in this instance, you may still be eligible for deductions. Read more about the details on the IRS website.
Clearly, keeping careful records of how much you spent on start-up expenses is critical to receiving this benefit without penalty. With accurate accounting practices and record-keeping, you’ll have what you need to prove these out-of-pocket costs even if you get audited.
Even some fees, interest, and loans can be written off
While these tax benefits aren’t in the same league as the ones above, minor deductions can still add up and save money off of your business’s total tax bill. So be sure to document these deductible expenses:
- Any accounting fees (including what you pay someone to prepare your tax return)
- Bank fees for services such as checking accounts, ATM usage, and other banking services
- In some cases, you may be able to deduct bad business debts—losses incurred after loaning money to a vendor or employee that was not repaid.
The key to claiming these tax benefits for small business owners is to keep careful, accurate records of your business-related expenses throughout the year. With paperwork to support your qualifying expenses, you’ll save money on your tax bill so you’ll have more to invest in your business.