We’ve all seen the studies of late, the terribly bad economy in recent years has caused more recent college graduates and mid level professionals to open their own small business because of a lack of available permanent employment. Like any small business, it is important to ensure you have all your tax deductions in place. Here’s some great ones to keep in mind:
The granddaddy of them all. The big cahuna. The big wave. Ok, I think you get the idea but we all know that rent or mortgage is typically the average consumer’s biggest budget item, sometimes taking away half of their income on a monthly basis.
For a home office, it’s pretty crucial to remember one simple thing-you can only deduct the amount of your home that is actually used as your home office. As an example, I have a back bedroom which houses both my home office as well as our guest bedroom. While I’d love to deduct the entire cost of that room, the IRS would certainly scream foul. I can however, deduct only a percentage of the room that I use as my home office, as well as a portion of my garage that I use to store excess inventory. For my wine business, all of this is a bit easier because I have to carry a variety of business permits for my house, in addition to my warehouse so the IRS already knows my space exists.
Travel is a bit interesting. The good news is that airplane flights, car trips or any other type of transportation is completely deductible. Likewise, the entire cost of your hotel can be deducted. The bad news? When you eat out, you can only write off half of your total check. I believe the reason behind that is that the IRS thinks that you were going to eat something for dinner, no matter where you happened to be that evening. So stay at a nice hotel and eat at cheaper restaurants!
SEP-IRA or a Simplified Employee Pension Plan is the way that most small business owners choose to save for retirement, well in addition to maxing out their individual IRA’s as well. There aren’t many rules when it comes to SEP IRA’s other than the maximum contributions are 25% of an employee’s earnings, or $50,000 for the year, whatever leaves a smaller number. Also for the business, these are incredibly easy to set up and offer the same types of contribution scales no matter how many employees you have. That’s a positive if you’re just starting out and are planning on hiring staff in the near future.
There is one appreciable tax downside to owning your own small business, social security. For employees, you contribute 7.5% of your paycheck into social security and then your employer matches it. If you happen to be both the employer as well as the employee, yes you guessed it you’re paying double. One small caveat, you can deduct your own contribution on your personal tax return so that saves you a bit, but there is a definite disadvantage here for small business owners which is unfortunate.
About the Author: Mark Aselstine is the owner of Uncorked Ventures, an online wine club focused on delivering the highest quality wine in the industry.