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Top Small Business Deductions – Keep More Cash!

Yes, you can leverage on these small business deductions to build a significant tax shelter by writing off substantial dollars from your home based small business. Without a doubt, you can put the IRS tax laws in your favor to pocket big bucks.

Generally, you’ll find there are two types of tax laws; laws for business owners and laws for people who do not own a business (employees or W2 earners). There are tax deductions that W2 earners get. But did you know that business owners have the benefit of getting both the W2 deductions PLUS an entire slew of business deductions?

It’s no wonder so many people are opting to start small businesses; especially home based. Even running a small home based business part time will open the door to your keeping more cash.

A home office tax deduction is like having a money tree that just keeps on growing.

First, you need to make sure you qualify for a home business deduction. You’re entitled to a home office deduction if your dwelling unit (home, apartment, etc.) is used exclusively on a regular basis as “one” of the following:

* Part of a daycare business

* A separate structure not attached to your dwelling unit

* Your primary place of business

* A place of business where you meet with customers or patients regularly

The following are small business deductions for a home business:

Home Office Deduction

You can deduct the percentage of your home that is used for your business. For example, if you have a home business office that occupies 20% of the total area of your home, you can deduct housing expenses for mortgage interest, property taxes, utilities, repairs, garbage and homeowners insurance.

For example, Jack runs an eCommerce home based business occupying 20% of his entire home. If Jack racks up $12,000 in housing expenses, he would be able to deduct (20% * $12,000) = $2,400 off of his total income.

Small Business Deductions – Vehicles

You have the choice of using one of two methods for small business deductions on your vehicle. You can use the actual expenses or mileage rate methods.

Using the actual method, you can deduct all of your business related car expenses. This includes deductions for gas, repairs, maintenance, wash, insurance, depreciation, taxes, interest and other miscellaneous car related expenses.

Under the mileage method, also called the IRS method, the IRS allows you to deduct 55 cents per mile driven for business purposes for 2009.

So, the method you’ll want to pick will be the one where you’ll get the most small business deductions for the business use of your vehicle.

Deducting Business Entertainment

You are able to deduct 50% of your business entertainment cost. The IRS requires you to thoroughly document when it comes to small business deductions for fun/entertainment. First, IRS requires you to keep receipts for all business entertainment expenses over $75.

The IRS also requires that you must conduct your business meal in an atmosphere conducive to doing business, such as a restaurant. If you took a prospect out to a movie theater to eat and discuss business, that wouldn’t fly with the IRS.

A third requirement of the tax law, business must be discussed before, during or after the meal in order to deduct the meal.

Finally, the IRS says you must specifically document the business meal event. You’ll find using a diary or tax organizer will become one of your best friends along with your vehicle mileage log book.

Hire Your Child

You’re really going to want to take advantage of this deduction. Hire your minor child as an employee of your business. Per the IRS the child must be under 18 and although it’s not clearly written into the tax code, the IRS frowns on hiring children below age 7. So, you’ll want to keep the age range between 7 and 17.

There are definitely benefits to hiring your minor child. First, in 2008, the first $5,450 of wages your child earns is “tax free” because your child will receive a standard deduction of $5,450 on their individual tax return.

On top of this, you would personally still get your standard child tax deduction when you file your return. Also, kids under 18 are exempt from social security and unemployment taxes “if” your small business is set up as a sole proprietor or LLC.

To illustrate, you hire your 10 year old child to clean your office and do some filing. For the year, you pay your child $5,450. You can deduct the $5,450 on your Schedule C and you don’t have to pay social security or unemployment taxes.

It gets better – your child will fill out his/her own 1040 and deduct the $5,450. Then, your kid can put that money into a ROTH IRA which would build up tax free to be used for education, living expenses, or what have you.

Other Small Business Deductions

* Tax preparation and accounting fees

* Legal Costs

* Internet, phone, postage PO Box costs

* Education costs

* Business bank fees

* Office Supplies, rent, equipment

* Start-up costs

* Marketing costs

* Subscriptions

* Travel

Exit Strategy – Every Business Owner Should Have One

Okay, you are a business owner, or maybe you’re just dreaming up your ownership. Possibly, you’re one of the lucky few and managed to grow your business. Or, possibly, you’re just daydreaming about it. Millions of important business issues occupy your mind. How to increase sales? How to manage expenses? How to make your marketing more effective? Etc., etc., etc…  Yet, in most cases one thing is forgotten by most business owners – Business Exit Strategy. Day-to-day operational challenges keep you from thinking strategically.
“What!? Why should I plan my business strategy now? I am not planning on selling the business for another 5-10 years. When time comes, I’ll figure it out…”
Your business is most likely your most valuable asset. Shouldn’t you be rewarded at the end for countless hours and sleepless nights you spent on growing your business?..
Regardless how you started the business, at some point you have to leave it!
There are many ways to “exit” business:

  • pass it to your heirs,
  • sell your share to a partner or employee,
  • find an outside buyer,
  • simply close the door and leave.

Most definitely the very last option is the least desirable, yet, not surprisingly, the most common one. In most cases, business owners neglect planning their exit strategy assuming that at some point solution will come. However, nothing happens on its own. At some point business owners may loose their interest in the business, can get sick, old, incapable to manage any longer. It doesn’t happen overnight. Sometimes it takes years. Depending on its subjective circumstances, business starts slowly or rapidly decline. You may think that situation isn’t that bad and you can fix it just by applying some effort… Wishful thinking! Unfortunately, it never happens! Business will keep declining to the point that it isn’t worth anything and the only option you have is to close the door and leave.

Quite frequently business owners assume that their children will take over the business. In majority of cases the assumption is wrong. Children have their own life and their own plans, and don’t want to take over  family operation.

Selling to a partner or employee is quite a good idea, especially if you have to carry a note for the part of the purchase price, primarily because you know well that your successor is experienced operator and most likely will succeed. Yet in most cases these transactions aren’t as financially rewarding as selling to outsider; you may loose about 20% of the purchase price. If you decide to take this route, start training your successor in managing the business as early as possible.

Business brokers at Global Business Group face all these challenges every single day. We constantly suggest business owners to think about their business’ future and help them planning the exit. Have a question about your particular situation? Contact professional business broker for complimentary consultation. There is always an exit and experienced business brokers are probably the best advisers in these matters.