Tax season is daunting for every person, but entrepreneurs and small business have to pay attention to deductions and benefits. There are different business strategies and structures to run a successful business. Each businessperson prefers different methods to save money. Here are some tax strategy savings for your business.
Use Startup Costs for Tax Deductions
Commencing your new business is an exciting event, but you will require time and money. You can get a tax break from IRS to deduct almost $5,000 of initial business cost. This deduction enables you to decrease taxable income from self-employment tax and income tax. It includes Medicare tax and social security tax. The typical cost of business startup comprises different items like buying operational fees, supplies and equipment. The remaining startup cost must be depreciated over next 15 years.
Special Rule for Deprecation for Large Deductions
If you are using large items for business (items that you will use for 1 or more years), you can’t deduct the whole cost in this year. Instead, you should depreciate these items and take a section of cost on the annual tax return. To deduct large amounts in the similar year of acquisition, you may get the advantage of depreciation allowance. With this allowance, you can take 50% of the item’s cost as a tax deduction in the acquisition year. It is an essential rule for tangible properties.
Moreover, you can take 100% deduction of the cost of business property that you have purchased during the year. The 179 section allows you to get the advantage of depreciation deductions. It may be used for tangible properties for your business. The amount is limited to almost $500,000 during the tax year. The rental residential property doesn’t qualify for this deprecation.
Contribution to Retirement Account
After establishing your business and cash flow, you are getting shelter of more income for tax purpose. A practical and conventional method of this work is to make an investment in future and efficiently contribute to IRA account for your spouse and you.
Both spouses can contribute almost $5,500 tax-free for the tax year. Self-employed people can set up their retirement accounts, such as SEP (simplified employee (worker) pension) accounts and Savings Incentive (inducement) Match plan for employees (worker) (Simple) accounts. With these products, you may contribute as a person and an employer to double the amount of tax-free income.
Deduct Household Expenses
You may work from a home office, part time or full time. In this situation, you can deduct some living expenses as your business expenditure. In your home office, you must have space for your exclusive use to conduct business. If you have a desk in the bedroom of your guests, you will not qualify for this deduction. You must have an additional bedroom to convert in an office. Common expenses that you have to deduct are depreciation, repairs, utilities, insurance, and mortgage interest.
Car Expenses
If you are using a car for your work purposes, you can claim deductions on a portion that is used for your business. You can deduct travel expenses, such as driving for a client meeting. The IRS and CRA allow you to deduct expenses associated with your vehicle. For example, registration fees for a car, toll charges, maintenance and repair, parking, depreciation, lease payments, insurance, oil, and fuel.
For instance, if you drive 50,000 km one year and 25,000 km driving is for business use, you can claim 50% deduction because it is an eligible expense.
Income Splitting Possibilities
The US and Canada use marginal taxation system. This system means that higher income will make you fall into the higher tax bracket. If you have an opportunity to split your income with your family members, you must try this to decrease your income and pay less taxes. Dividing income means that income of your business is shared between different family members. Instead of bearing tax alone, you can use this strategy to decrease your tax liability.
You can get the advantage of these tax strategy savings for your business. To get the benefits of tax deductions, you must have a complete record of expenditures. You should hire a tax preparer and accountant for tax preparation and bookkeeping. These will help you to decrease the chances of error.
