You work hard to run your own business, so why not claim all the eligible tax deductions. However, when dealing with the general stresses of preparing for tax time, many business owners often overlook a number of deductions and credits. Missing out on these tax breaks can add up to losing out on a lot of money.
These are five often overlooked small business tax deductions you should know:
1. Section 179 Software Depreciation
Many small business owners may be familiar with the tax savings related to depreciation on capital investments like equipment and machinery. However a large number are not aware that under IRS Section 179 you can also claim software depreciation. As long as your business was profitable in 2016, this valuable tax write-off applies to off-the-shelf software for business use. Read more at IRS: Electing the Section 179 Deduction.
2. De Minimis Safe Harbor Deduction
Yet recent changes should make business owners sit up and take note! Recently increased from $500 to $2,500, this IRS-set limit “dictates whether an asset purchased by a business can be immediately expensed; or if it must be capitalized and then depreciated over time,” says Jonathan Duong, CFA, CFP, president, founder and owner of wealth advisory firm Wealth Engineers, LLC.
“Under the increased limit, business owners can accelerate the tax deduction they take on items like computers, tablets, and smart phones – which often cost more than the previous threshold of $500,” he says. Duong explains the higher limit simplifies bookkeeping for many business owners because there’s no need to track depreciation over several years for low-dollar assets. “There are a few requirements in order to utilize this deduction, so business owners would be wise to ask their accountant about it and verify that they qualify,” he suggests.
3. Casualty and Theft Loss Deduction
While tax deductions for personal property loss due to disasters (i.e. flood, hurricane, tornado, fire, earthquake,volcanic eruption and theft) may be well-known, business owners may not realize that the Casualty and Theft Loss Deduction covers business property loss as well. Additionally, if that loss was from a federally claimed disaster area and warranted public or individual assistance, you can treat the loss as having occurred the previous year, so that it can be claimed on your current taxes. See the IRS Business, Casualty, Disaster & Theft Loss Workbook for more information.
4. Mileage and Auto Loan Deductions
Every time you hop in your personal vehicle to drive somewhere for your business, you’re accumulating eligible mileage deduction. And, you may never even think of it!
The standard mileage rate for the 2016 tax year is $0.54 per mile. However, if you claim a section 179 deduction for the vehicle you won’t be able to claim business mileage as well. And don’t forget that if you have a car loan but use your vehicle for business sometimes, you can also claim a portion of your auto loan interest. Find out more at IRS Transportion.
5. Research & Development Deduction
Have you spent money researching how to improve or test a product in your business? If you’ve incurred costs to “eliminate uncertainty about the development or improvement of a product,” your business could be eligible for the Research and Development (R&D) deduction. Significant changes regarding the R&D deduction were signed into law as of January 1, 2016. It is now possible for qualified businesses to use the deduction to offset alternative minimum taxes (AMT) and the Social Security portion of employer’s payroll taxes.
Even smaller businesses may have eligible expenses in this area as well, including product costs incurred to develop:
- The formula
- An invention
- A patent (including the associated attorney’s fees)
- A pilot model
- The process
- Development of internal-use software
Review the IRS’ Research & Development page for more details.
As a time-strapped small business owner, you may not be as ready for tax season as you’d like. Yet carving out even a few hours to do your tax research could be worth it. After all, you don’t want to leave money on the table when tax time rolls around.