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The Federal and State Tax Return: Maximizing Small Business Gains
Tax time is always trying for a small business—Internal Revenue Service (IRS) rules are lengthy and numerous, meaning it's easy to miss deductions or make mistakes. Here are five ways to maximize the potential of a small business federal and state tax return.
1) Automobiles and Advertising
According to Business News Daily, many small businesses forget to claim allowable federal deductions for both employee vehicle mileage and advertising expenses. As of Jan. 1, 2014, companies now can claim 56 cents per mile for any business-related travel which includes trips to see clients, to the bank or even the post office, so long as the travel is for work purposes. It's also possible to calculate the actual costs of operating business vehicles rather than using the IRS standard rate. When repairs, insurance, gasoline and parking expenses are totaled, the amount often is larger than using the per-mile alternative. The trade-off? Time required to calculate these exact expenses.
Advertising costs also may be deducted from federal tax returns. According to the IRS, companies "generally can deduct reasonable advertising expenses that are directly related to your business activities." In other words, keeping a company's name public can be a legitimate federal deduction.
Small businesses can expense up to $500,000 of equipment purchased per year, according to IRS Code Section 179. This code also allows companies to claim up to 50 percent depreciation of business assets in the first year purchased, which means vehicles, technology or even large office furniture can all be expensed come tax time. In the first year of business operations or during a period of rapid expansion, this can have a significant impact on tax return amounts.
3) Managing Salaries
It's also worth noting that new Medicare surtaxes impact salary compensation for small business employees, especially executives. Those reporting income or salaries of over $200,000 per year are now subject to a 0.9 percent Medicare tax, along with an additional tax of 3.8 percent if adjusted gross income is over $250,000. To minimize the impact of salary on a federal or state tax return, companies might consider the use of non-taxable fringe benefits instead of salary. Health insurance, medical reimbursements and business-provided parking all qualify and can help bring salary or income down under the $200,000 mark.
4) Charitable Giving
Giving to charity can have several positive outcomes for small businesses. In addition to helping those in need and aligning with a company's publicly-stated social responsibilities, charitable donations also may provide tax deductions. Not all charities are eligible for tax breaks, however, so it's important to use the IRS EO (Exempt Organizations) Select Check tool before making a contribution if the ultimate aim is maximizing tax deductions. Ideally, companies can find a charity which aligns with their values while also providing a measure of tax relief each year.
5) State Deductions
Deductions vary across the country, but almost every state offers some breaks for small businesses. Texas, for example, ranks as the 9th most business-friendly state according to Forbes, and companies can take advantage of tax credits and deductions if they use solar, wind or biodiesel power in any part of their business. The state also offers tax exemption for the transport of certain products, which include "goods, wares, ores, and merchandise other than oil, gas, and petroleum products." Bottom line: It's worth checking state government web pages for information on what type of state tax return credits exist and how long they last.
Many small businesses are in the unique position of earning corporate-level income but without the guidance of in-house professionals at tax time. Intelligent use of deductions and credits, however, can help maximize both federal and state tax returns.
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