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The SMB write-off checklist

“There’s no good reason you should ever pay more than you have to — in fact, it’s your right as an American not to pay more than you have to.”- Tony Robbins, Money: Master The Game

Yes, it is your right to never pay more than you have to. But it is also your responsibility to understand what you should and should not pay taxes on. Unfortunately, the delineation between the two isn’t so black and white. The tax principle set forth in Code Section 62 simply states that a legitimate deduction is any expense incurred in the production of income. Talk about a grey area. It’s no wonder why even the most seasoned business owners may miss some write-offs!

That’s why knowledge is the first step to empowerment. When it comes to small business tax deductions, we all know the usual suspects — home office, telephone, travel — what about the lesser known write-offs? Ever heard of R&D tax credits? What about all those maintenance checks on your car? From the cost of getting a fledgling business off the ground to the expenses incurred running a well-oiled machine, Here are four deductions that may have slipped under the radar.

Sure, you may have missed some of these crucial deductions in the past. But the beautiful thing about our mistakes is that they can serve as lessons for the future. So this tax season, get deduction-savvy. Because with the right information, you can potentially save yourself from needlessly paying hundreds, if not thousands of dollars to the tax man.

Startup costs

Did your business incur expenses before you were even open for business? Did you know that those expenses can be counted as deductions as soon as your business starts logging sales? That’s right. You can deduct up to $5,000 in business startup costs for the first year, and the rest will be amortized over 15 years.

But just what does the IRS define as a deductible startup cost? Let’s take a closer look. Expenses that do qualify include:

  1. Expenses incurred during your research and development phase. To determine the viability of your business, you may have had to conduct market or product research. This could range from surveys to product analysis to checking out various factors involved in your business location. Any expenditures associated with this would be tax deductible.
  2. Expenses incurred while getting your business ready to operate. Before launching, you not only have to train your staff and pay them wages and salaries, you have to find vendors, distributors, and customers, which could create travel expenses. The good news is that such expenditures are deductible, as are any costs associated with advertising, professional and consultant fees.

The caveat here is that you need to keep adequate records of these expenses. Credit card reports are okay, but paper receipts are best. And remember, these costs will only be deductible if your startup phase ends with the formation of an operating business.

Car expenses

Every year, the IRS issues a standard mileage rate to help you calculate the amount you can deduct for business-related car costs. For 2014, that rate was 56 cents per mile. It’s easy math that makes for an easy deduction. But easy doesn’t always mean best! In fact, by taking what may be considered the harder route, you could end up saving a significant amount of money. There’s a better way!

Here’s how it works. Instead of applying the standard mileage rate to the number of business-related miles you drove, find the percentage of miles that were related to work. To do this, just divide your total number of business-related miles by the total miles driven and then apply that percentage to all costs associated with “maintaining” that car. This not only includes gasoline, but service, car washes, tire changes and even satellite radio costs! In most cases, the deduction is larger than if you use the standard calculation.

It’s important to remember that miles driven commuting do not count as business-related mileage. But any additional driving your job may require absolutely does. So keep tabs of where you drive and why you had to drive; it could end up paying off.

R&D tax credits

Every year, R&D tax credits save businesses billions of dollars. Are you getting your piece of the pie? Maybe not!

Despite the fact the R&D tax credit has been around for decades, it is one of the most overlooked tax deductions for small businesses.

Why is that? Well, while some may simply have never heard of the R&D tax credit, others are just completely unaware that their activities even qualify.

We hear the term R&D and immediately conjure images of white lab coats and scientific experiments. But you don’t need to be part of a major corporation with a research lab to qualify for the R&D tax credit. In fact, it has nothing to do with the size of your business. It has everything to do with the intention!

To put it simply: any business that creates, develops or enhances products or processes can qualify for an R&D tax credit. Whether you’re a tech company working on the next great app, or a pastry chef creating a sugar-free, organic frosting, all that matters is that you are changing the game, and the government will reward you for it.

So just what does R&D cover? A lot, actually. It covers all time, money and resources invested toward the advancement and improvement of products and processes. This includes:

  1. Wages paid to employees who directly contributed to R&D
  2. Expenses associated with supplies and software used in R&D
  3. Any money spent on contracted R&D services

And if you’re just learning about this now, you may still be able to take advantage of the credit. The IRS recently changed the rules and is now allowing companies to “look back” three open tax years and take any credits that were never claimed! Submit those amended returns and 120 days later you will get cash back, with interest.

R&D tax credit is probably one of the more complicated tax breaks to understand, but if you do qualify, it can be a fairly valuable asset to your business. Just be sure to ask your CPA about it so it is done correctly. In most cases, your CPA will bring in an R&D tax credit specialist who will assess your situation and create a detailed report as to why you qualify.

Cost segregation

Buying or remodeling a building can be one of the biggest costs your business incurs. Fortunately, there is a way to help soften the financial blow; it’s called cost segregation.

In the simplest terms, cost segregation allows business owners to increase their tax deductions by accelerating the depreciation of certain categories of assets.

Here’s how it works:

If you have purchased any type of commercial property since January 1, 1986, then you qualify for a cost segregation study. With a cost segregation study, a team of professionals, usually engineers, will inspect your property and segregate every single component into one of two categories — personal property or real property — and then allocate the components to their appropriate recover periods.

Personal property includes things like equipment, furniture and fixtures — basically, all components that can be removed without compromising the integrity of the property. These items can be depreciated over five, seven or 15 years.

Real property includes things like wiring and walls, which constitute part of the actual structure of the building and cannot be relocated. These items can be depreciated over 27.5 or 39 years.

Does this really make a difference?

Yes! Without cost segregation, you would be depreciating the entire value of the building itself over 39 years. But with cost segregation, you are now able to break that cost down into various components that are depreciated over much shorter amounts of time. And by accelerating depreciation (and lowering your taxable income), you are putting more money in your pocket right now. And more money now means more value tomorrow!

Team Tony

Team Tony cultivates, curates and shares Tony Robbins’ stories and core principles, to help others achieve an extraordinary life.

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