Small Business Tax Credits And Deductions

By Mark Di Vincenzo. May 7th 2016

With the nation’s unemployment still well over 8 percent, there is a lot of talk these days about small business tax credits and deductions and about whether they help spur employment by giving small businesses more money to hire workers. Some say yes. Others say there isn’t enough evidence to say that they do.

That debate won’t get settled here, but we will ask and answer the most frequently asked questions about small business tax credits and deductions.

What Is A Tax Deductible Business Expense?

Just about any "ordinary, necessary and reasonable" expense that helps your small business earn money is deductible. The IRS defines ordinary, necessary and reasonable as anything "helpful and appropriate" for your business. Buying a computer, couch or even a TV for your office or store may be an ordinary, necessary and reasonable business expense. Buying those things and placing them in your living room isn’t a business expense.

If I Use My Car For Business, How Much Of That Expense Can I Write Off?

As of Jan. 1, 2012, the IRS set a standard mileage rate of 55.5 cents per business mile driven. A more complicated way to figure this out is called the actual expense method. Under this method, you can deduct the actual costs you incur to operate your car. Deductible expenses include gas and oil, repairs and maintenance, license fees, insurance, tolls and even car washing. You must figure in a depreciation value for gas and repairs, according to a tax code schedule, and if you use the car partly for personal use, you must figure out how much of the actual expenses are for business use. Regardless of which method you choose, you must keep a detailed log of business miles driven. (For more information, see Use Your Car For Business And Get A Tax Break.)

What About Business-Related Entertainment?

You may deduct no more than 50 percent of expenses for entertaining clients or customers for business purposes. Examples of qualified business entertainment include taking a client to a ball game or a concert, or treating them to a meal at a restaurant. You also can deduct expenses if you are entertaining at your house. If the IRS audits you, you will need to prove that these expenses were related to your business, and your records should include receipts and lists of the people who were entertained. The exception to the 50 percent rule is parties, picnics and other social events for your employees and their families. Those events are 100-percent deductible and you don’t need to prove that they were business related.

If You Buy A New Computer System This Year, Do You Have To Deduct The Cost Over A Five Year Period?

Probably not. The general rule is that the cost of capital equipment -- equipment with a useful life of more than one year, such as a computer system -- must be deducted over a number of years. But under Section 179, you can deduct in one year the cost of tangible personal property that you buy for your business, such as computers and office furniture. There is a limit to the amount of business property expenses you can deduct each year under Section 179. This year the limit is $125,000, down from $500,000 in 2011.

If You Work From Your Home, Can You Take The Home Office Tax Deduction?

Maybe. The home office deduction allows you to deduct a portion of your rent or mortgage costs as well as some related costs, such as utilities, insurance and remodeling. But you must meet strict requirements. You won’t be eligible for the deduction, for example, if you sometimes use your office for personal reasons. Check with an accountant to learn about other requirements.

Does Incorporating A Small Business Start-Up Offer Tax Credits?

Probably not. Most corporate tax benefits go to profitable, established companies that can afford tax-flexible pension plans and other perks that start-ups and sole proprietors usually can’t afford to offer. Keep in mind that incorporating also adds state fees as well as legal and accounting charges, so you may want to postpone incorporation until your start-up starts doing well. (For more information about incorporation, see A Guide To Forming A Corporation.)

The Small Business Health Care Tax Credit Has Received A Lot Of Press Lately. How Does It Work?

It gives tax credits to small businesses – with fewer than 25 full-time equivalent employees – that offer health benefits to their employees. To qualify for tax credits, the average annual wages of employees must be less than $50,000 and employers must pay at least half of the health insurance premiums. Tax-exempt organizations may also be eligible.

How Many Business Tax Credits Does The Internal Revenue Service Recognize And Which Are The Most Popular Ones?

The IRS recognizes nearly 30 different business tax credits, which are deducted from the taxes that businesses pay. The vast majority of these credits are part of the General Business Credit, the granddaddy of tax credits. Other popular business tax credits include the Work Opportunity Credit, the Disabled Access Credit, the Empowerment Zone & Renewal Community Employment Credit, the New Markets Credit and the Credit for Small Employer Pension Plan Startup Costs.

How Do You Claim The General Business Credit?

Start with Form 3800, the form for general business credits, and then if appropriate, find forms for the specific credit you are seeking. For example, Form 5884 is for the Work Opportunity Credit, Form 8826 is for the Disabled Access Credit and Form 8874 is for the New Markets Credit.

If you have questions about tax credits and deductions, contact an accountant or a lawyer who specializes in business or tax law. You can also check out IRS rules at www.irs.gov.

Sources

More in category

Related Content