Overlooked Small-Business Tax Deductions: 5 Things You Need to Know

Almost every business expense you make can turn into a tax break. How to find the ones that will save you even more money.

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Gimme a break: Almost every small business expense can be turned into a tax break.In business, just about every expense you have can become a tax break. In most cases, you can subtract the expense from your revenue to determine your profit (or loss) for tax purposes.

However, there are some opportunities -- as well as traps -- that can cost you valuable tax write-offs if you don't know what to look for. Want to make sure you don't miss out on often-overlooked small-business deductions? Here are five things you need to know.
1

Take advantage of new laws.

The tax code is always in flux, and, unless you stay on top of things, you can miss out on new tax deductions. Some new breaks run for a limited time, and if you fail to take action before the expiration date, you'll lose out. For example, there is a 100 percent exclusion for gain on the sale of certain small business stock held at least five years -- the stock must be acquired before Jan. 1, 2012. If your company qualifies, you may want to issue additional stock to owners or bring in new investors before the end of 2011. The IRS posts new law developments as they occur, and you can follow @irsnews for tax news updates on Twitter.
2

Find out about obscure tax breaks.

There are some tax breaks you may never have heard of, and this can cost you in lost tax savings. For example, your corporation may qualify as an "eligible small corporation" (capitalization of no more than $1 million and certain other conditions). If you take a loss on stock in this corporation, it can be treated as an ordinary loss up to $50,000 ($100,000 on a joint return) rather than as a capital loss (capital losses in excess of capital gains for the year are limited to $3,000). Review the list of deductible business expenses in IRS Publication 535, Business Expenses (the 2010 version is not yet available).

Note: If you have a business expense that could have been deductible but you failed to claim it on the return, you can file an amended return in most cases. Usually, you have three years in which to act. In the case of worthless securities and bad debts, there's a seven-year window for amending your return. For example, if you learn in 2011 that the loan you made to a business associate went sour in 2009 and there's no chance of collecting a penny, you have seven years from April 15, 2010 (the due date of the 2009 return) to file an amended return and deduct the bad debt.
3

Make smart tax elections.

In some situations, the law gives you a choice on how to treat certain costs for tax purposes. It's up to you to choose the write-off method that provides you with the greater tax savings.

For example, if you use your personal car or truck for business, you can deduct the costs associated with business-related driving. The law lets you choose between deducting your actual costs or using an IRS-set mileage rate (it's 50 cents per mile in 2010 and 51 cents per mile in 2011). Assuming you qualify and have the records needed to back up your deduction, it's wise to choose the write-off method that works better for your tax situation. Other examples of deduction choices:

• First-year expensing (Sec. 179 deduction). If you purchase new or pre-owned machinery and equipment for your business and you're profitable, you can opt to deduct the cost in the year of purchase rather than depreciating it over five, seven or more years (the period is fixed by law). But you have to make the election on the return or you'll have to use the alternative: regular depreciation.

• Net operating losses (NOLs). You can deduct business losses against your income in other years. You can carry back the losses for a set period (typically, two years) and forward for up to 20 years. Or you can waive the carryback entirely and just carry your losses forward. Waiving the carryback can give you more bang for your NOL buck if you're in a higher tax bracket in future years as compared with prior years.

Note: There are deadlines on making elections; most must be made by the due date of the return and usually can't be changed without IRS approval.
4

Use tax credit opportunities.

Not every expense is deductible, but this isn't necessarily a bad thing -- some expenses may give you an even greater tax benefit by producing a tax credit. A tax deduction saves you only as much money as the tax bracket you're in, while a credit cuts your tax bill dollar for dollar. Say you're in the 25 percent tax bracket and spend $1,000 on an item for your business. If that item is treated as a tax deduction, it saves you $250 ($1,000 times 25 percent). If that item produces a tax credit, it saves you $1,000 in taxes.

Increasingly, Congress is creating tax credits rather than deductions. For example, the HIRE Act to encourage job creation has a new credit for retaining newly hired employees on your payroll for at least 52 weeks. The health care reform package has a tax credit for small employers paying at least half of the medical insurance premiums for their staff. You can peruse the list of business-related tax credits in Form 3800.
5

Don't lose out on deductions because of poor records.

You may not overlook a tax deduction, but it may overlook you if you fail to keep the right type of records required by the tax law. For example, if you wine and dine customers and vendors, you usually can deduct half the cost of the meals, but only if you have the records to prove this expense. If you fail to keep receipts and expense account records, you can lose out on legitimate deductions. Special recordkeeping is required for such costs as:

• Business gifts
• Car and truck usage
• Charitable contributions
• Meals and entertainment
• Travel

Substantiation rules for travel, entertainment, gift and car expenses are explained in IRS Publication 463 (the 2010 version is not yet available, but the substantiation rules have not changed).

Tags: 5 Things You Need Know, how to save on taxes, IRS, small business tax breaks, small business tax deductions, small business taxes, tax breaks, tax deductions, tax season

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