Paying taxes is an unavoidable part of life for every American citizen, but small business owners know better than most how burdensome tax obligations can be. Luckily, there are also plenty of tax breaks owners can take advantage of. Whether it’s through business vehicle deductions or special breaks for new equipment leasing or financing, it pays for owners to know where they can save come tax time.
Putting your wheels to work
While many small business owners focus on their actual premises, the tax savings available to them extend to their vehicles as well. Whether you use your own car for business purposes or your business has a vehicle of its own, you can deduct some of the costs associated with it from your taxes.
There are two primary ways to claim these deductions. You can either deduct all of your actual business-related expenses or deduct a specific amount for each mile driven, in addition to all business-related toll costs and parking fees.
The first method may be more suitable for new cars or trucks, as you can also deduct depreciation for the vehicle. However, if you want to use the second method, keep in mind that you must claim it the very first year you use a car for your business. Also, this method will not be available to you if you have previously claimed depreciation deductions or have used a Section 179 deduction for the vehicle.
Finally, remember that if you use your vehicle for both business and personal needs, you can only claim deductions specifically for the business side. Saying that all of your deductions are related to your business when you also use a vehicle for personal purposes is a great way to get in trouble with the IRS.
Taxing the tools of your trade
Whether you’re the only employee of your business or you have a sizeable staff, no enterprise will be able to succeed without the right equipment. Fortunately, many small business owners have been able to obtain the materials and tools they need through equipment leasing without emptying their business capital. As an added bonus, this strategy also offers owners the chance to save more on taxes.
The federal government considers leased equipment to be an off-balance sheet operating expense. This means you can take deductions from your taxable income for any equipment leased.
Additionally, Section 179 of the U.S. tax code allows businesses to deduct 100 percent of the depreciation on equipment during the term of a lease. This means business owners can speed up depreciation through equipment financing, instead of having to wait for depreciation to build over the life of the equipment itself.
Business owners may also be interested to know that there’s speculation the IRS may once again raise the deduction threshold for equipment to $500,000, a huge increase from current levels that would give owners yet another way to reduce their tax burdens.
Tallying the cost of doing business
Vehicles and equipment leases are far from the only ways for small business owners to take advantage of special tax breaks. In fact, many deductions come as part of the everyday costs of doing business, including hiring employees and obtaining insurance.
For example, you can typically deduct the pay you give employees, as well as the ordinary and necessary cost of insurance.
Also, if you find yourself borrowing money for business purposes, you can deduct the interest on the loan. And if you rent your business premises, this cost can usually be deducted as well.
Owners should research which tax breaks they may be eligible for, and work with experienced professionals who can help them maximize their savings. It’s also important to keep in mind how certain business strategies, such as equipment financing, can help boost tax savings.