What Can a Small-Business Owner Deduct From Taxes?
Generally speaking, the Internal Revenue Service (IRS) taxes total profits, meaning the amount left over after legitimate business expenses. Except for sales taxes and any taxes they levy on your own personal payroll, such as Social Security taxes, their intent is not to tax total revenues. You should carefully track every legitimate business expense you can if you're a small-business owner so you can deduct it from your taxes.
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Retirement Contributions
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A small-business owner can deduct contributions to retirement plans under a variety of provisions in the tax law, but some of the more common methods include 401k plans, including solo 401k plans, individual retirement accounts (IRAs), simplified employee pension plans and 412e insured pension plans. Each of these plans can be funded with tax-deductible dollars.
Health Insurance
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As a business owner, you can deduct the premiums on any group health insurance your company buys for you and your family as well as for your employees. These costs come right off the top line on your business tax return. If your business pays the premiums, you do not have to worry about only claiming costs that exceed 7.5 percent of your personal income. You may also deduct contributions to a health savings account.
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Wages and Benefits
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Your company can deduct any wages or benefits paid to employees, including health benefits, cafeteria plan benefits under Section 125, matching contributions to retirement savings accounts, bonuses and any other employee retention activities. You may not generally deduct the cost of life insurance premiums, except for limited group term life insurance, and even then only on the premiums necessary to provide $50,000 worth of coverage.
Meals and Entertainment
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Generally you may deduct meals and entertainment expenses you incur in dealing with clients, prospects and vendors. You may only deduct 50 percent of the bill, however, and only to the extent that the entertainment is not lavish or extravagant. The 50 percent deduction also applies to ancillary costs related to the entertainment event, such as cab fare to the restaurant.
Capital Equipment
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Some capital equipment must be depreciated over time. However, certain kinds of tangible property, including vehicles and heavy equipment, is completely deductible in the first year under Section 179 of the Internal Revenue Code. This can mean a substantial boost to after-tax cash flow in years when you have a large capital expenditure financed over time.
Travel
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You can deduct the costs of traveling to places where you must conduct business, hold meetings or attend conventions. You can also deduct mileage if you use company cars or your personal vehicle for business purposes. As of 2010, you can deduct 50 cents for each mile you drive for business purposes. You can deduct this from your personal tax return if your company does not reimburse you, or your company can deduct the amount it reimburses you. You cannot deduct the costs of commuting from your home to your principal place of business, but you can deduct miles you drive from your office to meet with prospects or clients or to visit job sites.
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