7 Commonly Missed Business Deductions To Cut Your Tax Bill
When you own a business, and especially if it's a startup, you may overlook some potential tax deductions that can save you money at tax time. Many business people and their accountants know about commonly-used tax deductions, but several other lesser-known deductions exist that can trim your company's tax bill even more.
The following list covers seven expenses you may not have even thought were deductible.
Commonly Missed Business Deductions
Your business may not be eligible for all of the following deductions or a deduction may have certain restrictions on it or guidelines that must be met. However, if you think you may be eligible for one or more of these deductions, check with your tax professional for more information.
Petty cash expenses
Petty cash is money used for the small items you pay cash for, like bagels for the office meeting or parking and tolls. Capturing these small expenses can add up to big tax savings.
If you have a retail business, you may keep cash in a drawer to make change. If you have a non-retail business, you may have cash on hand to pay for small purchases. If you keep cash in the office, keep track of what you spend it on.
In either case, the only way you can use these small expenditures to reduce your taxable income is to keep good records of them. Create a log book or use petty cash vouchers and make sure everyone notes the time, date, amount, and what you bought. At the end of each month, input these small expense transactions into your accounting system. You'll be surprised at how quickly they add up.
You can legitimately deduct expenses for the use of your car for business. But you must keep a contemporaneous (at-the-time) log and include information about the business purpose. The log is necessary for two reasons:
- To record mileage for each trip so you can show how much of your travel is for business (as opposed to personal) purposes
- To keep records on the exact amounts of expenses.
There are two ways to deduct business mileage expenses on your tax return: the standard deduction or actual expenses. You'll need to record all the expenses so you can decide which method is best.
Expenses for Preparing Documents
You may have incurred document preparation costs for a business plan or a loan application. If your business needs a loan and you use the services of a consultant, attorney, or accountant to prepare a business plan or financial data, you can deduct these expenses, even if you don't get the loan. Additionally, if you want to have the documents printed and bound these costs are also deductible.
Carrying Charges and other Fees
Carrying charges are fees and interest that you pay on property. Some carrying charges may be deductible if they are not capitalized (counted as long-term expenditures on capital assets). Don't forget bank fees, (including sales taxes on these transactions), overdraft charges, and insufficient funds costs. Yes, these are legitimate business expenses that can reduce the taxable income on your business tax return.
Research and Experimental Costs
The costs stemming from research and experimentation may be deductible if you choose not to list them as capital (long-term) expenses. Some research costs may be deducted in one year or amortized (spread out) over time. The IRS has more information about how to handle research and development costs and taxes. There are many restrictions and qualifications relating to this deduction, so check with your tax preparer.
You may also be eligible for a tax credit for some research and development costs.
Business Startup and Organization Costs
You may be eligible to deduct some of your business startup costs up to $5,000 and organizational costs up to $5,000. If your startup or organizational costs exceeded $50,000, your deduction may be limited. The rest of your startup costs must be amortized (spread out over time).
Following is the definition of startup costs, according to IRS Publication 536:
Startup costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.
It's definitely worth keeping good records on all costs related to startup, including travel expenses, phone and internet costs, and costs for working with advisors.
Miscellaneous Business Expenses
Miscellaneous expenses are often overlooked, but they are very important, because they can add up to a substantial amount. These expenses may be the ones you pay out of your own pocket and forget to get reimbursed for by the business. They can be meals with customers or clients. or a visit to the donut shop for treats for a meeting, or other costs you aren't sure how to categorize. Categorize them anyway! Add them all up and they result in additional, material deductions you should be taking for your business.