Businesses are a great way to have a steady flow of income; however, if it is not managed correctly, it can be an expensive venture. In order to minimize your tax liability on business income, it is important to claim the deductions applicable to your business. These will reduce your taxable income. However, because of the complexity of preparing your tax return, it is easy to overlook some of the available deductions. Here are a few of the most commonly missed business deductions.
Depreciation is a deduction which allows you to recoup some of the cost of business or investment property having a useful life beyond the tax year. Items that can be depreciated have a “limited life”, meaning they are only useful for a specific period of time. They will only last for so long before they fall apart or quit working. Depreciation allows you to realize the annual loss of value of property, although it is a phantom expense.
In order for property to be depreciable, it must meet certain requirements: the property must be owned, it must be used in business or in an income-producing activity, it must have a determinable useful life, and it must be expected to last more than one year. Common items depreciated is real property (other than land) used for an investment purpose, vehicles, and computer equipment. However, as mentioned, land can not be depreciated because it does not “wear out” or have a limited life.
If someone owes you money that will not be repaid, this may constitute a bad debt. However, for this amount to be claimed, you would have to have claimed it as income at some point. In a business setting, people often choose not to write off bad debt, because the accounts receivable appears positive on their books. However, if there is no hope of ever receiving the money owed to you, it may be more beneficial to reduce your taxable income. This way, you at least receive some benefit.
Depending on the size of your business and the complexity of the issues you may face, you may require help from a lot of professionals. This may include attorneys, accountants, insurance agents, and many more.
Attorneys alone may charge as much as $350 per hour of billable service. If you should get sued, do you have any idea how much that will cost you? However, there are also small reasons to seek the advice of an attorney on tax issues or business dealings. Do not forget to keep up with these expenses and deduct them. It may not seem like much, but it really adds up.
The same is true with accountants or CPA’s. If you have employees, you should absolutely use a tax professional. However, even if you do not have to file quarterly employment tax returns, it may be beneficial to have an expert on hand should any questions arise. However, as with any other professional fees, keep track of the amount you pay them and use it to reduce your tax burden.