How to Maximize Business Deductions

Maximizing business deductions involves understanding what business deductions are applicable to your business, recording and tracking transactions for verification, and filing for the deductions on income and state tax forms on time. Positioning yourself smartly, collecting the right information and filing taxes in a timely manner is the best way to maximize your business deductions.

Things You'll Need

• Company structure
• Products, processes and services
• Accountant
• Deductions types
• Expenses
• Tax forms
• Calendar

Instructions

1. When you first decide to open your business it is a good idea to find an accountant who is familiar with your type of business and industry. Meet with the accountant to discuss whether you will have employees, buy or lease a business location, provide employee retirement and health benefits, or charge for services and transportation. You also should talk to the accountant about whether your goods will be considered "finished" or "in process," and where you will distribute or sell your products. The accountant will help you structure your company and determine the records you will need at the end of the year to claim your deductions.

2. Money spent on sales tax, administrative costs, supplies, travel, materials, investments, vehicles, utility expenses, costs for research and development, education, health care, license registrations, business publications, and property all are potential tax deductions, but the parameters and details of what is applicable and deductible vary. For example, mileage can be deductible if the vehicle is used strictly for the business. Certain requirements apply and the rates change from year to year. A portion of health care costs can be deductible if they exceed a certain spend amount. Each deduction is different, and you have to know the parameters and meet the minimum requirements before claiming the expense and taking the deduction.

3. Filing for deductions requires using the right forms and submitting them on time. For example, with a limited liability corporation, business owners receive a Schedule K (similar to a 1099) from the company that shows the profit of the business. Certain deductions are taken against the business like mileage and supplies. Other deductions are written off as part of the personal assets of the business owners rather than by the company. The business owners, if they operated out of their home, might take utilities and other business related expenses on their personal return as long as they met the requirements for operating a business out of their home. Going through the effort of documenting all expenses so you can take deductions against them requires that you also submit your taxes on time. There are strict penalty fees against late filing and the costs of filing late can nullify the savings you might make on taking deductions. Some deductions can be taken over several years such as depreciation. Understand the rules before you track the records and file.

4. Structuring a company the right way may not provide more deductions, but it can still increase profit, which is ultimately why taking tax deductions is done. Some business owners structure their company in such as way that they don't take a full salary and instead, they put some of their earnings in a retirement fund. While this isn't considered a deduction, what it does do is defer when taxes are paid on this income to the time when the money is drawn out of the retirement account, ideally at a lower tax bracket when the individual is older and retired. Leasing products and services can be much cheaper than buying or hiring employees too. While you may have fewer deductions doing business this way, it may be advantageous in the long run.

Tips & Warnings

• Most large cities have a small business administration office and you can find them online too. Along with hiring an accountant and a lawyer for your business, also consider finding a mentor-someone who has done business in a similar industry who can guide you against making common mistakes. The SBA offers services and support to new business owners and they frequently help business owners locate mentors.

References

• Education deductions