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What Else Can I Deduct?

In both our Start-Up School and tax season work with self-employed business owners, I hear this question quite often. The source of the question isn’t a devious place, like “Hahahahaha, can I deduct my pet insurance and screw over the government!”, but from a place of frustration that the business in question doesn’t have any more obvious tax deductions.

I think the issue stems from how start-ups come into existence these days. Gone are the days of signing three year leases on office space, getting into a 5 year contract with AT&T for an office phone, and hiring a part-time admin out of the gate. Business owners these days are working from makeshift home offices, garages, or co-working spaces where overhead comes cheap. Office phones are being taken over by cell phones and VoIP solutions. Some print business cards using online services and set up their own websites. The barriers to entry are getting smaller and smaller, which is fantastic….until we get to the tax return.

I see so many Schedule C businesses running at 70% net profit margins, getting socked with self-employment taxes and income taxes, and wondering how to lower them. Here is the advice we offer:

  • Home office – Have we taken advantage of every single element of the home office deduction? If not, let’s reassess the deduction and see what we may be missing.
  • Business assets – Are you using computers, furniture, and other fixtures that were at one time personal assets? If so, we need to assign reasonable fair market values to those items and have the business deduct them as fixed assets by depreciating them. Sure, this opens you up to county taxes on business personal property, but we’ll probably gain more in the tax deduction than you’ll pay in property taxes. Besides, who runs a business with absolutely no assets? Everyone has a computer, so don’t set yourself up for questions from the county.
  • Mileage – Did you track your business mileage for the year? If so, did we deduct it?
  • Health insurance – Did you provide information on what you paid for your individual health insurance policy? While this deduction doesn’t reduce business income, it could be deductible as self-employed health insurance on your 1040.
  • Paying your kids – Do you have children who are old enough to work for you in your business? Putting a broom in your 18 month-old’s hands won’t count, but if we can reasonably set up your child as an employee with a reasonable rate of pay, it could be nice tax deduction for you. It’s not the easiest deduction to set in motion, but worth the time in some cases.
  • Pension Plans – I say this all the time…being self-employed is wonderful when it comes to pension plan options. Let’s explore those options and put you in touch with a financial planner to help implement it. Stat.
  • Accounting software – Sometimes finding deductions is as easy as reviewing the accounting application you’re using. We see data entry errors which cost some clients deductions, simply because they didn’t know what they were doing. Let us spot-check your accounting entries to make sure you’re not losing deductions inadvertently.

This is why we love tax planning with our business clients. We aren’t magicians, but we know the questions to ask. We love reducing our clients’ taxes, because they can then use those funds to do wonderful work for their clients. And we never propose spending money just for the sake of a tax deduction. That’s not a smart way for you to use your precious resources.

So, if you’re a small business owner, let’s make sure you’re not giving your hard-earned money to the IRS unnecessarily. After all, they take enough of it already, don’t they?

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