Top Tax Tips for California Small Businesses

“I don’t care about tax savings. I want to pay the IRS more than what I actually owe,” said no business owner ever.

Let’s face it – becoming knowledgeable about tax saving tips and implementing tax minimization strategies can be some of the most important steps to save yourself from feeling as though you are handling half of your business’s income over to Uncle Sam. Check out our guide below for an overview of some of the top tax savings tips for business owners. You have probably heard of a few before, and there may be some that might be new. If you need a referral to an accounting firm to help you get your business’s books in order, drop us a line and we will do our best to help.

Section 179 Deductions

Section 179 allows businesses to deduct the full price of any qualifying equipment or software purchased or leased (up to $500,000) rather than depreciating it over the life of the asset. Bonus depreciation allows business owners to depreciate 50% of the cost of new equipment purchased in 2015. Small businesses can opt to deduct the full amount of certain property as expenses in the year the business began using them. This is referred to as section 179 property and can include up to $500,000 of eligible business property in the 2016 tax year. Some eligible deductions include:

Property used in manufacturing, transportation and production
Any type of facility used for business or research
Buildings used to hold livestock or horticultural products
Off-the-shelf computer software

Excluded:

Land
Investment property
Land outside of the U.S.
Buildings that provide lodging
Buildings that are used to store air conditioning or heating units

State/Local Taxes

Deduct state and local sales tax you charge on your goods and services; the amount you collect from your customers is part of your gross receipts, so this deduction is merely a wash. You can also deduct licenses and regulatory fees and taxes on real estate and personal property. Your employer taxes, including the employer share of FICA, FUTA, and state unemployment taxes, are fully deductible. However, for self-employed business owners, the deduction for half of your self-employment tax is not a business deduction; it is an adjustment to gross income on your personal income tax return.

Insurance

The cost of your business owner’s policy, malpractice coverage, and business continuation insurance is fully deductible. However, there are two rules to note for health coverage. A small business may qualify to claim a tax credit for up to 50% of the premiums (a better tax break than a deduction). Also the cost of health coverage for self-employed individuals and more-than-2% S corporation shareholders is not a business deduction. Instead, the premiums are deducted on the owner’s personal tax return.

Home Office

If you use part of your home solely for business purposes, you may be able to deduct expenses for that portion. The deduction is available for both homeowners and renters as long as (i) that part of your home is regularly and exclusively used for business; and (ii) it is your principal place of business.

There are two methods of calculating the home office deduction. The Simplified Option applies a standard deduction of $5 per square foot of home space used for business, up to a maximum of 300 square feet. The Regular Method requires you to determine the actual expenses of your home office including mortgage interest or rent, insurance, utilities, repairs, and depreciation. Multiply those expenses by the percentage of your home space you use for business.

These expenses are deductible as a business expense if the home is used regularly and exclusively as the principal place of business, a place to meet or deal with clients or customers, or as a separate structure used in the business. However, only about 30% of small businesses that are entitled to take this deduction actually do so. Why? Many believe that this deduction creates a red flag and forego a deduction they are legally entitled to take.

The deduction includes both direct costs (e.g., painting a home office) and indirect costs (e.g., the percentage of rent or mortgage interest and real estate taxes that reflect the percentage of business use of the residence). This means satisfying two conditions: using the space as your principal place of business or for some other acceptable purpose and using the space regularly and exclusively for business. Find more details about this deduction in IRS Publication 587.

The deduction, however, isn’t limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses — rent, mortgage, insurance, electricity, etc. — that you can claim.

Interest on Business Loans

Interest on loans that the business takes usually is fully deductible as a business expense (e.g., interest on a line of credit used in a construction business). However, it’s a different story for loans by owners. Distinguish business interest from an owner’s investment interest or passive activity interest, which is not a business deduction. For example, an individual who takes a personal loan to buy shares in an S corporation must allocate the debt proceeds to the business assets. If the assets are all used in the business, then the owner’s interest is deductible business interest. If some assets are investments, then a portion of the interest is investment interest. If some assets relate to a passive activity, such as rental realty, the allocable interest is passive activity interest.

Mileage vs. Gas Bill Receipts

You probably already know about deducting mileage, parking fees and tolls for business use of your car. Most people take the standard mileage rate deduction because the record keeping requirements are less burdensome, but actual expenses often yield a larger deduction. Keep track of the mileage, odometer start and finish for each trip, destination, the starting point and business purpose. The actual expense method often yields a higher deduction, including repairs, insurance, maintenance and depreciation for the business portion of use.

Startup Costs

Costs you incurred before you opened your doors for business, such as expenses to explore business opportunities, may entitle you to a deduction in your first year of business. Although you have to be operating a business in order to deduct business expenses, you’d think that costs you had before you actually began wouldn’t be deductible, but you’d be wrong.

You can deduct up to $5,000 of the startup costs you incurred before you began operations in your first year of business. If the costs exceed $5,000, they can be amortized ratably over a period of 15 years. However, if these costs exceed $50,000, there are certain limitations that apply. Get more information about this deduction in IRS Publication 535.

Tax Minimization Strategies

CPA Mark Kohler has an excellent article providing an overview of tax minimization strategies that can help affirmatively lower your company’s overall tax obligations. Implementing strategies that are designed to take advantage of lawful deductions and other available tools in the Internal Revenue Code is not just for blue-chip companies. Knowing what provisions you can take advantage of might save you more than you might realize.

Getting Legal Help

AXIS Legal Counsel’s Business Practice provides legal advice to numerous small businesses with a variety of legal matters, including business formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management / insurance, labor/employment matters, intellectual property, healthcare, crisis management, directors/officers, private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents businesses, corporations, LLCs, LLPS, partnerships, and startups in need of a corporate lawyer, for business legal matters as well as business litigation, such as disagreements, non-solicit agreements, non-competes, trade secrets, and other disputes with businesses. We are also experienced in providing assistance to business clients concerning business contracts, corporate formation matters, contracts and transactions, business litigation, business legal advice for Corporations, LLPs, LLCs, Partnerships, Small Business, Startups, and others involving corporate law.

If you are seeking a business lawyer, or for information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact [email protected] or call (213) 403-0130 for a confidential consultation.