When you’re first starting your business, every penny counts, so you definitely don’t want to overpay your taxes. It’s easy to overpay your taxes by not taking advantage of tax deductions available to small business owners. It’s more difficult, however, to determine what you can deduct. You don’t want to miss these four tax deductions. (Don’t forget, you can also deduct your business mileage!)
Hopefully you kept receipts from purchases you made before you ever made your first sale because you can deduct those costs. Startup costs include surveying the market, product analysis, visiting potential locations, and employee training.
If your startup expenses were $50,000 or less, you can deduct up to $5,000 on your 2017 tax return. The $5,000 deduction is reduced dollar-for-dollar after you’ve spent $50,000. For example, if you spent $52,000 in startup costs, your maximum deduction is $3,000.
As soon as you start making sales, your business leaves the startup phase, and your expenses are deducted as business expenses.
Business expenses are the costs you incur to conduct your business. Deductible business expenses include rent for your office or storefront, paying your employees, and interest paid on a loan.
To deduct a business expense, the cost must be ordinary (common in your industry) and necessary.
Equipment & Software
Under Section 179, you can deduct the full purchase price of equipment and software used for your business. Section 179 encourages businesses to invest in themselves. You must purchase and put the equipment or software into service during the tax year you want the deduction. For the 2017 tax year, you must purchase and begin using the equipment by midnight on December 31, 2017.
Under the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), you can deduct up to $500,000, if you spend $2,010,000 or less on equipment or software. If you spend more than $2,010,000 on equipment, the deduction decreases dollar-for-dollar after the $2,010,000 mark, making Section 179 particularly favorable for small businesses.
You can also take advantage of a first-year bonus depreciation deduction of 50% in 2017, 40% in 2018, and 30% in 2019.
If you’re considering buying equipment for your business, you can use the Section 179 Calculator to see how the deduction will save your company money.
What Qualifies for a Deduction?
Under Section 179, you can deduct business vehicles, computers, office furniture and equipment, machinery, and off-the-shelf software. You can even deduct equipment that is only partially used for business. That deduction will depend on what percentage of time you use the equipment for business-related activities.