Tax time can be especially stressful for entrepreneurs, who struggle to reduce the amount of income they pay taxes on by tallying deductions. However, it's easy for time-strapped business owners to miss a deduction here and there throughout the year, especially if they don't know that certain expenses qualify. There are many popular apps out there that can help you maximize your deductions and save money. Offerings from FreshBooks, Xero, and Avalara can help you track finances throughout the year to make filing taxes easier.
As we get down to the wire, if you haven't finished filing, it's important to make sure you've captured every expense possible. Here are five deductions commonly missed by business owners and sole proprietors.
1. Startup costs.
Few businesses take off in their first week. They're usually launched months after initial conceptualization and built slowly. It can sometimes take years to start bringing in serious income. During your unprofitable years, you may not claim the deductions associated with your startup, knowing you'll have to show a loss if you do. But many entrepreneurs don't realize that they can claim those "startup expenses" retroactively with a limit of $10,000. It's important to study the allowed deductions for small businesses and make sure you cover even the smallest items purchased for the purpose of launching your startup.
2. Home office.
If you work out of your home, you can deduct the area of your home dedicated to your office on your taxes. The area must be exclusively used for business purposes on a regular basis, so only measure the section where you actually work. Instead of calculating the percentage of your utility bills, mortgage, and other expenses, the IRS now allows a standard deduction of $5 per square foot, with a maximum size of 300 square feet. You can still itemize your deductions on that space if you'd prefer, but the standard deduction option is designed to make it easier for taxpayers.
3. ATM fees.
If you use an out-of-network ATM while stuck at the airport or in a remote area, you may be able to deduct that extra fee. It's important that you have a separate bank account for your business and that the fee was incurred on that business account. You should also be able to demonstrate that the fee occurred while you were participating in an activity related to your business, such as traveling to meet a client or participating in a conference.
4. Converted personal assets.
In your early days, you likely relied on equipment you already owned to start your business. Just because the laptop or office you're using was designated for personal use previously, that doesn't mean you can't claim it as a business use later. You'll just need to determine the date it was converted to business use and depreciate it based on the length of time you owned it before converting it. You'll also need to calculate the fair market amount of the item on the date you converted it, with the fair market value being the amount for which you could sell it to a buyer on that date.
5. Health insurance.
Once you're self-employed, you probably no longer have access to employer-provided health care. The good news is, you'll likely be able to deduct the health employment premiums you pay for yourself, your spouse, and your dependents. This deduction extends to medical, dental, and long-term care premiums, so be sure to claim all of these items on your return. Don't forget to claim any out-of-pocket medical expenses you incur throughout the year, including deductibles and items like eyeglasses and prescription medications.
Tax time can be chaotic, but by knowing the many deductions available to small-business owners you can reduce your bill and maybe even get a refund. The best resource is a qualified tax professional, but it's important you let that tax professional know every expense you've had throughout the year to make sure you claim every dollar you can and have the documentation to back it up.