Tax Tips For Small Business Owners

Small Business Tax and Over-looked Income Tax Deductions

The following article has been written by Donna Nell. She is associated with Oak View LawGroup, A Trustworthy Bankruptcy Law Firm, and writes articles on various financial topics, such as Debt Consolidation, Debt Settlement, Debt Settlement California, Bankruptcy, Investment Opportunities and Monetary Policies etc.

While filing tax returns, nobody wants to shell out more to the government than their obligation or miss an opportunity to enhance their return amount. However, while filing, many small business owners cannot take advantage of the tax benefits that can result in considerable tax savings.

Regarding taxation, businesses under $500 million are usually taken as small businesses and therefore tax deductions may be very considerable. However, there are still many small business owners who are not aware of the deductions and incentives they are entitled to, which can certainly make a huge difference to their finances.

Actually, the taxation rules are constantly changing thus making it very difficult for the most astute small business owner to stay aware of all the Internal Revenue Service’s deductions and credits.

Below is an assessment of many new, enhanced and often-overlooked tax deductions that the small business owners are eligible for.

Domestic Production Activities Deduction

In 2010, businesses with “qualified production activities” can take a tax deduction of 9% from net income. Kira Brucker, CPA, Nazelrod & Associates, a Baltimore, MD-based financial services firm, says, “The largest missed deduction by small businesses is the domestic production activities deduction (Section 199)”. This deduction is applicable for businesses like construction, engineering or architectural services, film production, or lease or sale of equipment manufactured in the U.S. Additionally, under a “safe harbor” rule (IRS Proposed Regulations 1.199.3.f.3), a business can receive the deduction if at least 20% of the total costs comes from direct labor and overhead costs from US-based operations.

As this deduction requires extensive calculations, many experienced taxpayers are afraid to take it. Brucker says this “a very significant loss. ” For example, the deduction increased from 3% in 2006 to 6% in 2007, to 9% in 2010 of qualifying business net income from domestic production activities which can amount to considerble tax savings.

The Alternative Simplified Credit

The “Alternative Simplified Credit” equals 12% of the surplus of running-year qualified research expenses (“QREs”), as specified under section 41(b). The alternative simplified credit will be used by many US companies doing significant numbers of R&D but unable to claim the regular credit. Now, many industries are making use of this alternative simplified credit, including the chemical manufacturers, automotive industry, defense and aerospace organizations, informational technology and telecommunication companies. The Alternative Simplified Credit allows businesses to take a credit that otherwise would not qualify for the regular credit due to changes in business structures and other effects on R&D amounts.

Going Green May Mean Saving Green

Several business tax credits have been applied to buy environment friendly hybrid vehicles and to enhance the energy efficiency of commercial buildings. You may check out with your local state controller website or with your accountant to know the state tax inducements are available for your small business.

Child Employees

If you have hired children for your business, you can get a healthy deduction for their salary. Additionally, since there are no age restrictions for Roth IRA contributions, you can contribute up to $5,000 in 2010-2011 for each child’s Roth IRA as long as they have that much in taxable income. A Roth IRA can also grow tax-free over the course of their lives that can amount to substantial savings.

Free Tax Help for Small Business Owners

Small business owners have the advantage of taking tax deductions such as tax depreciation and section 179, office expenses, and many other deductions not offered to non-business owners.

The primary way we do this as small business owners is to make sure that we are taking full advantage of all income tax deductions that our company qualifies for. In this article, we are going to discuss the top income tax deductions and offer tax help that most small business owners will be able to take advantage of, but it is paramount to understand that the most important aspect of tax savings is to ensure that one has a very consistent and reliable method of record keeping. In the event of an IRS audit, it is imperative that one have full records detailing all company deductions.

Operating Expenses

Operating expenses generally include costs such as utilities and office supplies, but the largest deduction in this section is office space. Business owners that operate out of brick and mortar locations are entitled to deduct the office rent as a business expense. Since the amount spent on office space tends to be one of the largest business expenses a company incurs each year, it also tends to be the one of the largest deductions. Business owners who work from home are entitled to claim their home office as a tax deduction under certain conditions.

Capital Expenses

This type of deduction includes physical assets that depreciate each year such as computer equipment, company vehicles, building, and other wasting assets. These deductions are not deducted directly from taxes the same way that business expenses are; instead, they are depreciated over multiple years as determined by the IRS. Forex brokers and other financial firms will typically have enormous computer equipment deductions due to the nature of their business. Click tax depreciation for a complete discussion of section 179 and tax depreciation deductions for assets.

Business Travel

Depending on your type of business, this can be a huge area of deduction. Even if you are not traveling by plane and staying in hotels on a regular basis, small business owners can still write off all of their auto mileage and any other expenses that are accrued through business travel.

Employees

If your small business employs workers, then you may be entitled to very large income tax deductions, depending on how many benefits the employees have, such as retirement, health, etc. Of course, the more employees you have, the bigger your deduction is going to be.

These are just a few of the major areas of tax deduction that small business owners are able to take advantage of. As stated at the beginning of the article, the best method of ensuring that you are able to take advantage of these deductions is to make sure that your company has a very detailed and organized method of record keeping. One of the best ways to do this is to use a tax software program so that you can track these expenses throughout the year.

Best Accounting and Tax Software

The complexity of your business will typically dictate the complexity of the tax software you want to use. If you are a sole proprietor and your business cash flow is rather straightforward, then it may be best to use more of a personal finance software like Intuit’s Quicken.

However, if your company has various areas of operation, expense, and income, then you will most likely want to use a more complicated and inclusive software such as Quickbooks or Peachtree. These two accounting and tax software programs will allow you to track company expenses and possible deductions in a very organized manner.

Click small business tax for a complete discussion of tax deductions including section 179, tax depreciation, and MACRS tax tables.

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This is a guest post from forextraders.com.

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