Note: This article first appeared at NerdWallet.com. Click here to read the original.
Failing to claim all the tax deductions you're entitled to is like flushing money down the toilet. As small business owners prepare their taxes this year, it's important they don't miss any of these most commonly overlooked tax deductions, to avoid paying more money to Uncle Sam than necessary.
1. Home office deduction
Do you use a room in your home as your primary place of business, where you deal with patients, clients or customers? You may be able to claim a home office deduction, as long as you use part of your home exclusively for conducting business. That means using a room as both an office and a place for guests to stay, for example, probably disqualifies you.
If you qualify, you can begin to figure out how much you can deduct by either deducting actual expenses, or by using the IRS's simplified method.
If you deduct actual expenses, only expenses incurred solely for the business part of your home will be eligible for full deductions (for example, painting or repairs in the area used for business). Indirect expenses — such as insurance, utilities, rent and general repairs — are deductible based on the percentage of your home used for business. Other unrelated expenses, such as lawn maintenance, are not deductible.
If you choose the simplified method, you figure your deduction by multiplying $5 by the square footage of the area of your home used for business. The IRS limits the area you can deduct under this method to 300 square feet, so the maximum simplified deduction is $1,500.
2. Startup expenses
You may be able to deduct expenses you paid to start your business, such as advertising, transportation, consultant fees, travel, employee training and wages, and legal and accounting fees.
Startup and organizational costs are usually considered capital expenses, which means you must amortize them — spread the deduction out over a period of years — rather than deduct them all at once in the year you pay them. However, you can deduct up to $5,000 in qualifying startup costs and $5,000 in organizational costs. The costs must be incurred in the year you started the business and before the day the business opened, according to IRS Publication 535.
Each $5,000 deduction is reduced by the amount by which your total startup or organizational costs exceed $50,000, and any remaining costs must be amortized over the next 180 months (15 years) of operation, beginning with the month after you started your business, according to the IRS. The details can get a little complicated, so it's best to seek the help of a tax professional.
3. Auto expenses
Do you use your car at all for business? You may be able to deduct the costs of operating and maintaining the vehicle. You have a choice of ways to figure your deduction:
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You can use the IRS's standard mileage rate for each mile your car was used for business purposes. The rate for the 2014 tax year was 56 cents per mile.
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Or you can deduct your actual car expenses for the year, which include gas, oil, tolls, lease payments, insurance, parking fees, registration fees, repairs and tires, according to the IRS.
Using the standard mileage deduction likely makes sense only if the total cost of all expenses is less than the deduction you'd get from taking the standard mileage.
