Small Business

Deduct Small Business Expenses

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Can I deduct my small business? How do I deduct my sole proprietorship business? That’s a question I get a lot from sole proprietors and other small business owners. The trick is that most information about small business taxes reads like it aimed at larger businesses, specifically, those that have employees. However, the same IRS tax rules that apply to those small businesses apply to entrepreneurs running their own single person business or small family business. It’s an important question because small business expense deductions can lower your overall tax rates and move you down a bracket on the tax tables. When Can You Deduct a Business? There is really one simple test that a business must pass to be tax deductible: Is there a profit motive? For the IRS, the sole determination of whether something is a hobby, or a legitimate, tax-deductible business, is whether or not you are doing it for profit, instead of for fun. Of course, it wouldn’t be the IRS without hundreds of pages of rules, regulations, and numerous publications sorting out just what is a deductible profit motive. There is a somewhat legendary tax law case where a man claimed his golf expenses as …

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2024 Section 179 Deduction Limits for Small Businesses Taxes

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Small business tax deductions are important in order to offset high business taxes levied against small business owners and entrepreneurs. This is especially true for work from home entrepreneurs who file as sole proprietors, or as a Limited Liability Company aka LLC, with sole proprietor tax status. Small business owners can get hit with high tax bills thanks to Self-Employment Taxes. Self-employment tax, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. In a typical employer-employee scenario, the employee pays 6.2% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. What many people don’t realize is that the employer also pays 6.2% in social security tax for the employee. A small business owner that files as a sole proprietor is on the hook for the whole amount! The self-employment tax rate – sometimes called the SE tax rate – is 15.3%, which is 12.4% for social security taxes plus another 2.9% for Medicare taxes. That 15.3% is on top of regular Federal Income Taxes. A successful small business owner in the 30% tax bracket, pays a blood curdling 45% tax rate. And that is before adding Medicare …

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Deduct Home Office on Taxes

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A home office tax deduction can be a great way to reduce your taxes if you own a small business. The home office deduction gets a bad rap because a few years ago, deducting a home office was seen as an “audit trigger.” However, that issue was blown out of proportion then, and it is almost a non-issue these days, provided you do have a business and a legitimate home office. So, how do you deduct home office on taxes? How To Qualify for a Home Office Deduction Qualifying for a home office tax deduction for your business is pretty simple, providing you have a home office that you use. The official rules state that your home office must be your primary place of business, and that you use the office exclusively for that business. In other words, you can’t deduct the little area you have setup in the corner of your living room as a home office. People giving tax advice will often go overboard here saying things like, if there is even one toy in your office, then it is disallowed as a deduction. This scares legitimate small business owners with home offices from deduction them sometimes. Keep …

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Business Tax ID Number – FEIN and EIN Explained

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There is an unfortunate amount of confusion surrounding the concept of the Federal Tax Identification Number. It is ironic, because the whole Tax ID, FEIN, and EIN thing is actually very simple, mostly because they are generally all the same thing. However, it isn’t surprising that this concept confused many personal finance students because when it comes to things like laws and taxes, tiny variations in terms usually mean very different things. What is a Tax ID Number? Tax ID Number, or Tax Identification Number (TID), and the like, all refer to the same thing. When taxes are filed, whether they are personal income taxes, or business income taxes, there must be a unique identifier used on the tax return. Likewise, if income is reported, that income must be reported to the IRS with a unique number identifying who it was paid to. In the case of Federal Income Taxes, the tax ID number is a Social Security Number. However, businesses do not have SSN, so they need a different unique number to use for identification purposes on tax documents. FEIN stands for Federal Employer Identification Number. It’s “brother” is the EIN which stands for Employer Identification Number. What Is …

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Home Office Tax Deduction

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One of the best deductions for self-employed people who work from home is the home office tax deduction. Basically, you take the square footage of your home office and compare it to the total square footage of your home, and then you get to deduct a similar percentage of certain house expenses as a business deduction. It’s one of the ways to take a little bit of the sting out of self-employment taxes. How To Claim Home Office Deduction Like most self-employed small business tax deductions, you take the home office tax deduction on Schedule C. You’ll need Form 8829 Expenses for Business Use of Your Home to calculate and file your deduction. If you use tax prep software like TurboTax, it will do this for you. (You’ll need one of the small business editions to take this deduction, but it’s most likely going to save you a lot more money than you pay for a more expensive version of TurboTax.) To qualify for the home office deduction, you have to use a specific area of your home exclusively, and on a regular basis. In other words, it has to actually be your office where you do your work for …

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Capital Gains Home Sale with Home Office Depreciation

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If you have a small business, the taxes can be pretty tough to swallow. That’s why you need to be sure that you take all the tax write offs you possibly can to lower your small business tax bill. These small business tax deductions are particularly important for solo entrepreneurs and other self-employed business owners who get stuck with additional self-employment tax. For many business owners, one important tax deduction is the home office tax deduction. This deduction allows home owners who use part of their home for business purposes to write off expenses including deducting property taxes, a portion of utilities and other costs of owning and maintaining a home. How Home Office Affects Capital Gains on Home Sale When you sell property, like your home, you typically have to pay taxes on any increase in the value of the asset. These taxes are called capital gains taxes. Fortunately, these taxes are often taxed at a lower tax rate than your standard tax bracket rate. Unfortunately, on the sale of a large asset, like your home, these capital gains can still be substantial. Luckily, there is a special home sale exclusion for capital gains on the sale of your …

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Do I Need an Accountant?

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The only question I get asked more often than, do I need a financial advisor, is do I need an accountant. The answer isn’t that complicated for most people, however, as with all things money and finance, there are always some exceptions that seem to throw off the ability for anyone to give a straight answer. So, let’s start with with what an accountant does and does not do, and then move on from there. The spoiler, if you are chomping at the bit to get a quick answer, is probably not, but let’s examine the angles to be sure. What Does An Accountant Do? First of all, before deciding whether or not you need an accountant, you should probably understand what an accountant does. More importantly, you should probably understand what an accountant does not do. Now, just like other professions, there are accountants who do more than accounting. I actually know some accountants who are also financial advisors. After all, there is some merit to wrapping all of your financial needs into one little package from the same professional you already trust. But, for our purposes here, we are going to focus on just accountants. That is, do …

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Quarterly Estimated Tax Payments Due Soon

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Estimated tax payments are due to the IRS on June 15 for the second quarter. (If you use a fiscal year calendar, then your second quarter payments are due by the 15th day of the 6th month of your fiscal tax year.) Use the 2012 tax tables to estimate your income and determine an approximate payment. Small business owners are required to make estimated tax payments because U.S. income tax is a “pay as you go” system. You can’t just wait until next April and pay everything at once. Remember there is a sort of tax withholding safe harbor that states that if, over the course of the tax year, you pay 100 percent of the amount of taxes you owed the previous year, you will not be liable for an under-withholding penalty. However, you will still have to pay any amount you owe come April of next year.

More Tax Deductions for Small Business Owners and Sole-Proprietorships

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A great tax saving strategy, particularly for higher-income taxpayers is to start a small business. Many expenses that are not deductible for regular Federal Income Taxes are deductible to a business. For example, the mileage deduction is not deductible for personal driving purposes, and mileage driving to work is also not deductible. However, mileage driven for business purposes is tax deductible. While starting a phony small business is not a good idea, no matter how big of tax savings can be achieved, there are many legitimate businesses that people can start. The key aspect of being legally considered a business for tax purposes is that there must be a profit motive to the activity. That profit motive must outweigh other reasons for engaging in the activity, otherwise, the enterprise could be considered a hobby instead of a business. Formally incorporate the business with the Secretary of State in your state. Set up a LLC, it makes a great business structure for single-owner small businesses and is typically cheap and easy to setup. Filling out an online form and paying a registration fee is usually all that is required. Then, get an Employee Identification Number, or EIN from the IRS. Unofficially …

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