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Tax Planning

Small Business Tax Benefits

transactionThere are perks to owning a business, too. In many cases, you have flexibility that you wouldn’t otherwise have in terms of your schedule. You don’t answer to anyone else; you’re the captain of your own ship. On top of all of that, there are some small business tax benefits that go along with business ownership, as well.

Here are some of the small business tax benefits that come with the territory:

  1. One of the biggest small business tax benefits is the self-employment tax deduction. Self-employment tax is the portion of Medicare and Social Security paid by employees and employers. For employees, that rate is 7.65%; for the self-employed, it’s 13.3%. For the self-employed, however, this tax is deductible from your net income. It essentially is treated as a business expense. You also only pay this tax on your net business income – and not all of that. You only pay on 92.35% of your net business income.
  2. The home office deduction. These small business tax benefits are useful if you have a workspace in your home that you use exclusively for business. You can deduct a percentage of your rent, mortgage, property taxes, utility bills, and even homeowners insurance premiums. If you’re audited, you need to be able to defend the deduction, so make sure this is well-documented.
  3. Health insurance premium deduction. If you pay for your own health insurance, you can deduct all of your premiums for medical, dental, vision, and long-care insurance. It’s actually one of the small business tax benefits only available to people who are self-employed.
  4. Entertainment deduction. If you conduct business with someone during a meal or an event, you can deduct half of the cost. That includes things like taking a client or potential client to a basketball game, or taking a vendor tout for a round of golf. Here again, make sure you document this area meticulously.
  5. Internet and telephone deduction. Even if you don’t claim a home office deduction, you can deduct business-related expenses in these areas. This deduction can be claimed even on a single phone or Internet line, it just has to be pro-rated based on how much you use the line or Internet connection for business.
  6. Interest deduction. If you have a business loan or a business credit card, the interest is tax deductible. Obviously, you’re better off in the long run without having to pay the interest, but most businesses have to borrow at least a little bit from time to time.
  7. Automotive mileage. If you use your car for business trips, the expenses involved are tax deductible. This is an area that often draws audits, so make sure you keep good records and follow all of the appropriate guidelines.
  8. Travel deductions. If you travel overnight outside your local area, you may be able to deduct the trip. You need to have a specific business purpose for the trip, and you must engage in a business-related activity. That can be sales, training, or other business activity.
  9. Education deductions. If you’re taking a course related to your business, you can write off the cost, as well. However, the course or training must be directly related to your business. An insurance agent taking a course on new insurance products would qualify, while the same agent taking a real estate course would not.
  10. The self-employed retirement plan deduction. This is one of the most profitable deductions from a tax perspective. SEP-IRAs, SIMPLE IRAs, and even solo 401(k) plans can reduce your taxes now and set aside tax-deferred savings for retirement. Depending on your business, you can contribute as much as 20% of your self-employment income (with an income cap of $245,000) plus an additional $16,500, for a total of $49,000 – all tax-free.

In short, owning a small business gives you a number of small business tax benefits. The key is to make sure you follow the rules to the letter, and that you document everything well. Some of these small business tax benefits – such as entertainment, travel, and home office deductions – can be looked at by the IRS with great scrutiny.