The tax code is complex and continually changing. With several deductions, you have different options when it comes to calculating the amount you may apply against your income. These are not shady, “creative accounting” methods. They are all legal options under the tax code. Different methods produce different results. What you did last year may not be the best option this year. It is wise to review your tax situation each year keeping an eye on these allowable business deductions and credits.
Track actual vehicle and home office expenses
The simplest way to take vehicle expenses is to record your business miles and apply the standard mileage rate, which for 2016 is 54 cents per mile. However, you may get a larger deduction by tracking your actual expenses, particularly if your vehicle is a gas hog.
The same goes for the home office deduction. If you have a home office that qualifies for the deduction, the simplified method allows you to take $5 per square foot. With the actual expense method, you calculate the percentage of your home dedicated to your office and take that percentage of your utilities, property taxes and other home ownership expenses as deductions. While the actual expense method requires more bookkeeping, this method may pay off with a larger deduction.
Compare the value of Section 179 expensing to bonus and regular depreciation
Section 179 allows you to deduct the full cost of non-real estate capital purchases, up to $500,000 a year, as an expense in the first year the property is purchased and used in a business. Regular depreciation schedules spread the deduction over the useful life of the property.
Another option, available through 2019, is bonus depreciation. The 2015 PATH Act extends this provision, which allows businesses to accelerate depreciation. The tax benefits of accelerating depreciation are obvious for the current year, but in the end, you may save more by depreciating over several years. If a major equipment purchase is in your future, it is worthwhile to run through the tax benefits of each depreciation method to find what works best for your situation.
Change your business structure to reduce your self-employment tax
As a sole proprietor, you must pay the employer and employee share of the Social Security tax, a whopping 15.3 percent on top of your federal income taxes. You may be able to reduce this by forming an LLC and electing corporate treatment. This may be a good option if you need to keep a large portion of profits in the business. You will only pay self-employment tax on the profits you withdraw from the business as your salary. Profits you keep in the business will be taxed at the corporate rate, but this may be lower than your individual tax rate.
Don’t overlook the Small Business Health Care Tax Credit
Along with the mandates of the Affordable Care Act, there are provisions in the law to help business owners pay for their employees’ health insurance. The Small Business Health Care Tax Credit is available to small businesses with fewer than 25 full-time employees who purchase health insurance through the small business options program (SHOP). The credit returns up to 50 percent of health insurance premiums costs to the employer. The remaining 50 percent may still be deducted as a business expense. If you can’t use the full credit in the current year, the remainder may be carried forward to offset future tax liabilities.
This article was written by Gillian Burdett for Small Business Pulse