Tag Archive for: taxes

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What To Do If You Couldn’t Pay Your Business Tax On Time

Woman looking at a laptop

Even if you pay your estimated quarterly taxes every three months, you may still owe more taxes than expected for the full year. In some cases, this happens because your business earned more than you initially estimated it would. While unexpectedly high revenue is usually good news, it may not be enough to absorb the full amount of the surprise tax bill.

If the tax filing deadline came and went and you were unable to pay what you owe, you can’t afford to ignore this problem. Eventually the IRS will contact you, and the problem will only get worse the longer you wait.

The best thing you can do is to seek assistance from a tax professional. They can evaluate your situation and advise you about your best options — and you do have options. Here are some of the most common ways to handle past-due business taxes.

If You Requested an Extension

If you successfully requested an extension before the tax deadline came, you’ve started off on the right foot. This helps you avoid paying extra fees and penalties you otherwise would be charged for filing late. When you request an extension, you must include an estimate of the amount you think you owe, and note what you already have paid in your quarterly payments.

The extension’s length will depend on the type of business you own, but it may extend the deadline by four months or more. While you still must pay what you owe, you will have more time to verify the amount you owe and gather the funds for payment.

Negotiate to Reduce the Amount Owed

Even with an extension on your taxes, you may not be financially able to pay your full tax bill by the new extended deadline. If you can demonstrate that paying the amount of tax you owe would place undue hardship on you or your business, you may pursue a deal known as an offer in compromise. An offer in compromise effectively reduces the total tax owed to an amount you can pay within a reasonable timeframe.

When determining your eligibility for an offer in compromise, the IRS takes into account your ability to pay, income, expenses, and asset equity. Before you apply for an offer in compromise, hire an experienced tax professional who can help you make your case to the IRS.

You cannot ask for an offer in compromise if the tax deadline passed without you filing an extension, or if your business is in an open bankruptcy proceeding.

If You Didn’t Request an Extension

If you didn’t request an extension before the tax deadline and the date has passed, your business now owes the IRS a tax debt. It’s important to resolve this tax debt as soon as you possibly can. Depending on how your business is structured, the IRS may hold you personally responsible for your business’ tax debt. There are a few ways you can confront your unpaid taxes.

Set Up a Repayment Installment Plan

If you know you cannot pay your entire tax bill in one lump sum, you can request a repayment installment agreement. Under such a plan, you receive extra time to pay your tax debt as long as you make at least the minimum monthly payments. Depending on the situation and the amount owed, an installment plan may last from 120 days to 72 months. Interest and penalties accrue on to the total you owe, so if you can pay more than the minimum each month, it’s highly recommended that you do so.

Apply for Temporary Reprieve

If your financial situation is dire enough, you may qualify for “currently not collectible” status with the IRS. In this case, the IRS determines that you cannot pay the tax you owe at this time without incurring serious financial hardship. This status is temporary, and penalties and interest still accrue on the amount owed, but the IRS refrains from taking stronger action against your business. This gives you extra time to gather the amount you owe to pay back your debt to the IRS.

Get a Professional On Your Side

All of these options exist because the IRS is well aware that for various reasons, some businesses cannot pay their taxes on time each year. The IRS is willing to work with you if you are proactive and transparent about your situation. Hiring a tax professional to represent you can help you achieve the best results, as they understand the nature of tax laws and tax debts and can advocate on your behalf.

If you didn’t pay your business taxes on time, don’t wait for the IRS to take action against you. Set an appointment with a qualified tax attorney who will help you understand your options and represent your business fairly as you negotiate a solution with the IRS.

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What Are Back Taxes and How Do They Affect My Business?

A team having a meeting

 

Back taxes occur when business or personal taxes are not filed and paid in full by their due date each year. They continue to accrue interest for as long as they remain unpaid, and many can incur a number of additional penalties as well.

Here are some of the serious and often severe consequences your business may encounter if you fail to remedy back taxes owed to the IRS.

Failure-to-File Penalty

Regardless of whether or not you can pay immediately, you should at least file your taxes. The failure-to-file penalty can be as much as ten times greater than the penalty for simply not paying. Often, this penalty is 5 percent of the unpaid taxes for each month that your tax return is late (not to exceed 25% of your unpaid taxes). The penalty can add up quickly, which is why tax professionals strongly recommend filing on time, no matter whether you can afford to pay the actual taxes you owe.

The IRS uses their Information Returns Processing (IRP) system, which automatically flags those who do not file for follow up. The IRP also provides an assessment of what you owe. It likely will not take into account any deductions or other measures you might use to reduce your tax exposure, meaning that the IRS tax bill it generates is likely going to be greater than one presented by an accountant.

In other words, if you don’t file your taxes on time you will face not only a failure-to-file penalty but a higher overall tax bill, as well — that’s not to mention the interest which will also accrue on your tax debt.

Failure-to-Pay Penalty

One of the more common reasons businesses incur back taxes is due to economic downturn. In this situation, it’s not uncommon for businesses to pay off their vendors instead of paying taxes, or to suppress withholdings for payroll taxes from the IRS.

If you didn’t pay your taxes by the due date, you’ll face the failure-to-pay penalty on top of your back taxes. (If you also incurred the failure-to-file penalty, both penalties will apply.) Generally, the failure-to-pay penalty will be 0.5 percent of your unpaid taxes per month. This penalty begins accruing immediately — the day after taxes are due — and continues to apply for every month (or partial month) your taxes remain unpaid (not to exceed 25% of your unpaid taxes).

While there are extreme scenarios in which a business won’t be subject to back taxes or penalties — such as natural disasters, a death in the family, or Innocent Spouse Relief — these are rare occurrences. More likely, your best option will be to work with an experienced tax attorney to resolve your back taxes, interest, and associated penalties as soon as possible.

Asset Seizure

If your company is subject to back taxes, the IRS is permitted to withhold any future tax refunds you and your business are entitled to receive until those taxes are paid off. If you are self-employed you may also find your retirement savings affected; this is because, during the period of unpaid back taxes, your income is not being reported to the Social Security Administration. In this situation, you’ll likely find it harder to receive future loans or financing for your business, particularly if the IRS has placed a lien on your business.

The IRS may also seize your assets in order to pay the outstanding balance your business owes. They also have the authority to levy or lien personal assets of the business owner and any other responsible party. In more extreme cases, the IRS  can shutter your business and seize your property without warning — no court order required.

How to Respond to the IRS

Tax payments simply cannot be avoided. The statute of limitations for pursuing tax debt is a lengthy ten years, and most people cannot avoid the IRS’ long financial reach for a decade or longer. To avoid the harsh repercussions of back taxes, do not put off or ignore the IRS’ demands, even if you have not been personally visited by an agent.

Contact the IRS immediately to ask for an extension, set up an installment plan, apply for an offer in compromise, or even request a temporary halt to the collection process. If none of these options fit your current situation, simply calling to acknowledge that you’ve received the collections notification will show good faith and work in your favor.

Once you’ve made contact with the IRS, begin making adjustments to lender and supplier payments as well as other expenditures in order to find the money to pay your tax bill. Working with a professional tax attorney can help you communicate with the IRS in the smoothest way possible. For the best approach tailored to your unique financial situation, contact the tax attorneys at Milikowsky Tax Law to discuss your options for resolving your tax debt.  

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6 Tax Code Updates That Could Affect You

A reflection of an office in a meeting

Millions of Americans overpay on their taxes each year, simply because they don’t understand how the system works. Since new tax reforms were passed in December 2017, it’s more important than ever to understand how the tax system could affect your finances. With updates to everything from the dedufctions you can claim to the amount you pay for healthcare, you simply can’t afford not to.

Read on to learn about the key updates from the IRS, so you know what to expect in the tax year 2018 and in the years to come.

1. New Tax Brackets and Rates

The new bill will maintain the seven-bracket structure, but income levels and rates are changing from 2018. The top tax rate will drop from 39.6% to 37%, which will be great news for high-earners with an income of over $500,000 (single filing) or $600,000 (joint filing).

Here’s an overview of what the updated tax brackets look like:

Tax Rate Income Bracket:

Single Filing

Income Bracket:

Joint Filing
10% $0-$9,525 $0-$19,050
12% $9,526-$38,700 $19,051-$77,400
22% $38,701-$82,500 $77,401-$165,000
24% $82,501-$157,500 $165,001-$315,000
32% $157,501-$200,000 $315,001-$400,000
35% $200,001-$500,000 $400,001-$600,000
37% $500,001+ $600,001+

2. Standard Deduction Differences

Not only are tax rates dropping in 2018, but the standard deduction has almost doubled. The standard deduction is a form of automatic reduction used to minimize the amount you pay on your tax return.

While the standard deduction has gone up for all U.S. citizens, it’s worth noting that personal exemption has been eliminated. In 2017, you may have been able to get a $6,500 standard deduction alongside a personal exemption of $4,150. In the new tax plan, you’ll simply receive a deduction of $12,000, which has simplified the tax situation to some extent.

In 2018, the standard deductions are:

  • Single: $12,000
  • Married and joint filing: $24,000
  • Married and separately filing: $12,000
  • Head of household: $18,000

3. Homeowner Tax Differences

Another significant change to the tax situation in 2018 comes in the form of the mortgage deductions homeowners can make. If you have itemized your tax deductions up until now, you will have had the option to deduct interest paid on your home or second home. This deduction could reach a cap of $1 million on your mortgage principal, and it could include more than one loan.

The new reform imposes a cap of $750,000. However, taxpayers who have already engaged in mortgages between $750,000 and $1 million will be able to continue on the old deduction — although the new reform removes the deduction permitted for home equity debt.

4. New Alternative Minimum Tax

The alternative minimum tax (AMT) was a concept implemented to make sure that high-income earners paid the right amount of taxes, regardless of the number of deductions available to them. Higher-income households had to calculate their taxes both under the standard system and under AMT, so they could pay whichever amount was higher.

For the most part, the government didn’t index AMT exemptions for inflation purposes. This means that over time, AMT started to affect the lower-income individuals it wasn’t intended for. The new bill adjusts exemption amounts for inflation purposes. For instance, for the single or head of household filer, the 2017 AMT exemption was $54,300 — now it’s $70,300.

5. Lost Deductions

Personal exemptions are disappearing under the new tax law. There is also a selection of additional deductions that will no longer apply in the years ahead. From 2018, lost deductions include:

  • Employer-subsidized transportation and parking
  • Moving expenses
  • Tax preparation expenses
  • Miscellaneous deductions under the 2% adjusted gross income (AGI) cap
  • Unreimbursed employee expenses
  • Theft and casualty losses

6. Changes to Medical Expenses

The medical expense deduction is one of the most frequently used deductions in tax law. Prior to the reform bill, it was possible to deduct medical expenses of up to 10% of your AGI. The new bill has reduced that percentage to 7.5%.

The Affordable Healthcare Act, or Obamacare, will remain in effect for 2018. The new bill, however, will remove the individual mandate penalty for those who don’t pay their health insurance.

Handling the Latest Tax Changes

As complicated as all these new tax changes may be, you need to know exactly what you’re dealing with when you file your tax return each year. By talking to a tax expert about your situation, you don’t have to worry about overpaying or filing incorrectly.

Contact Milikowsky Tax Law today and speak to a dedicated tax lawyer if you need help resolving tax debt, navigating an IRS audit, or otherwise understanding how the new codes will affect your finances.

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Get a Head Start on the New Tax Laws for the 2018 Season

Infographics

The April 2019 deadline for filing your 2018 taxes probably seems far in the future, but if you start preparing for the filing process now, you’ll save yourself a lot of stress closer to the deadline.

Here’s a handy guide to the new tax laws, the paperwork you need, and the tips you can follow to ensure your 2018 tax season is headache-free.

Notable Tax Changes for 2018

Several changes in the 2018 tax code may affect the taxes you will pay. The adjustment of the seven tax brackets is one of the biggest changes. The rates are now lower, and the income amount for each bracket has shifted. This applies to both single filers and to married people filing jointly. What’s more, the significant increase in the standard deduction means if you usually itemize deductions, you might fall into the standard category.

Personal exemption has also been eliminated. Check the W-4 you filed with your employer to find out whether you need to update the withholding allowance to compensate for these changes. If too little taxes are being withheld, you will owe more at tax time, so it’s better to discover and correct this early on to reduce the impact on your taxes.

The Paperwork You Need

You’ve probably found yourself surrounded by piles of paperwork, scratching your head during past tax seasons. You need quite a few different documents to fill out your tax return and if you identify your required documents ahead of time, you’ll save time and stress come April.

Every taxpayer needs documents reporting income such as W-2 and 1099 forms or retirement account documents. You may need additional documents showing interest paid on expenses such as mortgages or student loans, property taxes paid, and money spent on medical expenses and health insurance premiums. You must also provide the social security number for each dependent you claim.

If you plan to itemize your deductions, you should save bank and credit card statements and records or receipts from any deductible personal expenses. Knowing which of your expenses to track now is key — you don’t want to learn too late that you should have been tracking a particular type of expense because it’s tax-deductible. Attempting to go back and locate receipts and records takes time and effort, and you may not find or recall everything months later during tax season.

Staying Organized

Take the time to create a system for organizing your 2018 tax documents. When you get your filing system in order, it’s easier for you to remember which documents you need and where you keep them. You will also save yourself some hassle if you deliver your documents to your tax professional in one organized batch. This could reduce the chance that your files will be sent back to you because there are documents missing.

If you create a filing system now, it will likely work for you in future years with only minimal updates to account for changes in the tax code or your personal finances. Just imagine how glad you’ll be every tax season when you don’t have to sort through an entire year’s worth of disorganized documents and receipts.

Important Dates to Note

Your 2018 tax returns must be filed by April 15, 2019. Tax documents you are owed by other entities, such as W-2 forms from your employer, must be provided to you by January 31, 2019.

If you’re self-employed, you must also file quarterly estimated taxes on your earnings. Before the next tax season, make sure you’ve filed your quarterly estimated taxes by the following dates:

  • First quarter: April 17, 2018
  • Second quarter: June 15, 2018
  • Third quarter: September 17, 2018
  • Fourth quarter: January 15, 2019

Looking for the best way to file your 2018 taxes with confidence? Working with an experienced tax professional can help you navigate new tax laws and find every deduction you’re eligible for. If you owe a tax debt to the IRS or have been contacted by the IRS for an audit, it may be time to bring in a tax attorney. At Milikowsky Tax Law, our experts help you communicate with the IRS to manage audits and unresolved tax debt. Contact us today and enjoy peace of mind next tax season.

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6 Mistakes to Avoid When Filing Your Taxes

Man and woman in a coffee shop

Putting numbers into calculator while filing taxes

Understanding tax rules is complicated.

In 2018, the launch of the new tax reform means that US citizens now have a host of unfamiliar rules and regulations to keep up with — beneficial or not, any change in the rules can increase the stress involved with tax season. Already, millions of Americans make mistakes each year that can lead to consequences all the way from penalties to IRS audits.

Here are some key mistakes to avoid, to reduce your risk of facing a tax blunder for the year of 2018.

1. Forgetting to Double-Check Information

Surprisingly, a common mistake taxpayers make when it comes to filing their return is choosing the wrong filing status or accidentally selecting multiple filing options. Preparing your taxes online or with the assistance of a tax professional will ensure you choose only one filing status. The status you choose affects which deductions and credits you’re eligible for, as well as the value of your standard deduction. If you’re unsure because multiple options seem to fit your situation, the best thing you can do is discuss your circumstances with a tax expert.

Keep an eye out for any other clerical issues that might harm your tax situation this year. Double check your numbers, ensure you’ve entered the right social security details, and if you’ve chosen a direct deposit refund, make sure your bank account information is accurate. An error in any of your information will require you to refile.

2. Leaving Out Information or Failing to File on Time

Failing to file your tax return on time may lead to penalties and fees, and could even prompt the IRS to audit you. Even if you haven’t received any income this year, you’ll still need to file a return to inform the IRS of why you believe you have no taxes due.

When you do file your tax return, it’s critical to make sure that you include all the required information. For instance, the IRS requires you to claim any income you’ve made in the last year — regardless of whether you received a 1099 or W-2 from an employer. This includes any freelance work you may have done on the side. Leaving out information may result in you needing to file an amended tax return.

3. Overlooking Your Retirement Accounts

Filing your tax return is an opportunity not only to think about your current financial situation but your future, too. A huge tax blunder that many people make is failing to take advantage of retirement savings accounts; or overlooking important decisions and actions regarding their retirement accounts.

Consider Traditional or Roth

Whether you set up a 401(k) through your employer or an IRA (or both), be sure to consider the choice of traditional or Roth for your account.

A traditional 401(k) or IRA will reduce your taxable income for the years that you contribute, so you get an up-front tax break straight away. A Roth 401(k) or IRA allows for tax-free withdrawals during your retirement, so it won’t impact your taxable income currently but it may pay off significantly down the road.

Contribute Within the Limits

When you elect the amount you’ll contribute to any of your retirement accounts, keep in mind the limits. As of the new tax reform in 2018, the contribution limit for an IRA is $5,500 (for the majority of filers) and $6,500 if you’re over 50 years old. A 401(k) has a limit of $18,500 or $24,500 for those over 50.

Watch Your Withdrawals

If you are approaching or have already hit retirement age, be mindful of the rules regarding withdrawals from your retirement accounts. For instance, if you have an IRA and you are 70 years or older, you will need to withdraw a minimum amount from your account or face a hefty tax penalty. Plan ahead with your accountant or financial advisor to ensure you don’t lose any of your hard-saved money simply for neglecting your withdrawal minimum.

4. Not Taking Advantage of Credits

You likely already know to look for available tax deductions, but don’t forget to also check for tax credits. A deduction will reduce your taxable income in relation to your tax bracket, while a tax credit reduces your tax bill by a determined amount — regardless of bracket.

The 2018 tax reform has significantly changed the credits available. Here are just a few that may apply to you:

  • The offers a credit of up to $3,000 to care for a dependent child.
  • The earned income tax credit can reduce your taxable income by up to $6,000.
  • The child tax credit offers $2,000 for each qualifying child in the new reform.

5. Claiming Disappearing Deductions

While taxpayers love taking advantage of deductions, it’s important to keep an eye on what you can reasonably claim. If you ask for a deduction that no longer applies or has been adjusted, this may raise a red flag in the eyes of the IRS and could increase your risk of being audited. For 2018, disappearing deductions include:

  • Theft and casualty losses
  • Moving expenses
  • Tax prep expenses
  • Unreimbursed employee expenses
  • Employer-subsidized transportation and requirement
  • Miscellaneous deductions under the 2% AGI cap

6. Going it Alone, Without a Tax Professional

Many Americans struggle to get the most out of their tax returns, as they don’t fully understand all the deductions and credits available to them. Working with a tax professional like a CPA to file your return can help ensure you won’t pay more taxes than necessary.

If you owe tax debt to the IRS or are facing an audit, reach out to a professional tax attorney who can help guide you through the legal process of interacting with the IRS. Whether you want help filing your return this year or are worried that you can’t afford the taxes you owe, working with a professional is always a wise option. Contact our expert team at Milikowsky Tax Law if you need a tax attorney, or if you have questions about your tax situation.

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Removing a Federal Tax Lien

Woman holding a paper and a calculator

You’ve owed the IRS back taxes for some time and now a lien has been placed against your assets and property.

What does this mean?

If you’ve been hit with a federal tax lien, it’s important to know what you’re dealing with, so you can make the necessary preparations. Here at Milikowsky Tax Law, we’ve broken down how liens work, how you can get them removed, and what happens once they’ve been released.

How a Lien Works

The IRS will assess your tax liability and send you a bill explaining how much you owe and the deadline for the payment. A lien is the federal government’s claim against your assets and property, in the event that you fail to pay this tax debt. It protects the government’s interest in all of your property, including personal property, real estate, and financial assets.

Once a lien has been placed, the federal government will alert creditors to the fact that it has the legal right to your property with a Notice of Federal Tax Lien. Liens are also public record, so they will show up in your credit report.

A lien is different to a levy, although the two are often confused. Levies remove the property to pay the tax debt, which means a levy could be money taken directly out of your paycheck to pay to the IRS. A lien, on the other hand, only secures the government’s interest in your property when a tax debt goes unpaid.

The best way to avoid a lien is to pay your tax bill on time. But what happens when you find yourself the recipient of a federal tax lien?

How to Remove a Lien

The easiest way to get rid of a lien is to pay it off as soon as you can.

If you cannot pay the money you owe within the specified timeframe, you have a few options to reduce the burden of the lien:

  • Subordination: Subordination does not remove your lien, but instead allows other creditors to collect money before the IRS. This might help if you want to apply for a loan or a mortgage.
  • Discharge of Property: In some cases, your lien can be removed from specific property — however, The Internal Revenue Code has strict provisions for eligibility.
  • Withdrawal: You can apply to have the lien withdrawn if it was filed in error. Of course, this will only remove the lien and not the amount you owe to the IRS.

No matter whether you believe your lien has been issued by mistake or you would like to explore your options for having your lien released, you should always speak to a skilled tax attorney for assistance.

After a Lien is Released

Your lien will be officially released 30 days after your debt has been paid. A lien may also be removed earlier if it truly was filed by mistake, or if the IRS feels that it will help hasten the collections process. In any case, once your lien is released, your property will no longer be encumbered by the IRS.

At this point, your local county will be notified and your records will be updated to indicate that your lien no longer exists. The IRS will send you a copy of the lien release and you should forward this to your credit agencies immediately, so they can update your credit report.

Unfortunately, this does not mean that you’re out of the woods; a record of the lien will remain on your credit report from seven to ten years, unless it was filed by accident and you have the documentation from the IRS to prove it. This is why it’s crucial to seek support from tax experts who can help lessen the financial blow after a tax lien.

Contact Milikowsky Tax Law today, and our experienced tax specialists will walk you through all of your tax lien options during your free consultation.

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How to Prepare for a Payroll Tax Audit

A close up view of a green pencil laying on top of a payroll sheet

A close up view of a green pencil laying on top of a payroll sheet

Like most California business owners, you’ve likely kept diligent financial records and have never tried to defraud the government on your taxes. However, if the state targets you for a payroll tax audit, it may understandably cause you concern. The Employment Development Department (EDD), which oversees the enforcement of California’s employment taxes, is going to examine your records to make sure you have properly classified workers and remitted the appropriate taxes to the state.

An EDD audit does not need to be an arduous experience. There are things you can do to prepare, and you may want to consult with a California tax attorney about your situation for greater peace of mind.

Here is what every business should know about payroll tax audits.

The Basics of a Payroll Audit

EDD audits typically cover the three years prior to the audit. If no tax returns were filed, however, that period may be extended.

If you are being audited, the first step will be an entrance interview with the auditor. The auditor will explain why the audit is taking place, how it will work, and ask general questions about your business. You’ll have the opportunity to ask the auditor questions, too.

Be sure to read over all the initial documents concerning your audit carefully, and respond to all requests from the EDD. If you believe you need more time or need to seek legal counsel — which you have the right to do — let the EDD know as soon as possible. While you should never incriminate yourself to the EDD, trying to obstruct the audit ultimately isn’t in your best interest, either.

What the EDD Will Examine

The majority of the EDD’s examination will concern whether workers are misclassified as independent contractors. The written agreement between the two parties (the employer-employee or principal-contractor), as well as documentation of actual hours worked and wages paid, will be the main items the EDD will examine during the audit.

The key difference between contractors and employees in the eyes of the EDD is that each has a very different tax situation. Employers are obligated to withhold certain taxes from employees and remit them to the government. When employing a contractor, these taxes become the contractor’s responsibility. One function of the EDD is to ensure the state collects the appropriate amount of taxes, and that misclassifications, both intentional and accidental, are rectified.

Other records may need to be provided to the auditor. Documents you should round up as soon as possible include:

  • General ledgers
  • Records of cash payments
  • Check stubs
  • Bank statements
  • Annual financial statements
  • Income tax returns — both federal and state
  • Canceled checks
  • Check registers
  • Verification of business ownership

Review the EDD’s overview of the employment tax audit process for more specifics on the documents they may request.

The Outcome

Once the audit is over, the EDD will either inform you that no discrepancies were found, you overpaid and are owed a refund, or you underpaid and owe an assessment. They may also issue fines for certain transgressions — often unintentional ones — if they are uncovered.

Even for the most prepared of businesses, an EDD audit will require a lot of patience and time. Given the amount of records that will be examined and how important a thorough response will be, it’s likely in your best interest to reach out to an experienced tax attorney for guidance. A tax attorney can also guide you through the appeal process. You may not have faced this situation before — but a tax attorney has, many times.

A tax attorney can help you present the strongest case and, most importantly, always advocate for your best interests when you are up against a large entity like the state of California.

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Are You Maximizing Your Small Business Tax Deductions?

Woman using a laptop

Proud business owner stands smiling in his small shop

The lifeblood of every business activity is money, and small business owners need to hold on to as much of it as possible to keep their companies afloat.

The IRS gives small business owners some wiggle room in the form of tax deductions. Yet with so many available — from interest deductions, to payroll, to some small purchases — it’s hard to determine how to make the most of them.

To help you do so, let’s take a look at some common (and not so common) deductions that might apply to you.

Getting Started

The IRS allows small business owners to take advantage of tax deductions from the start by making start-up costs deductible. More specifically, expenses that can be deducted may include:

  • Start-up Costs: Costs associated with researching, investigating, and setting up your small business may be tax deductible. Possible expenses include travel, meals and entertainment, state filing fees, and franchise fees.
  • Rent: Any space rented for your business, such as an office or warehouse, can be deducted in full.
  • Co-working Space Fees: Paying rent isn’t always possible, or necessary, at the early stage of business growth. Sometimes working from a co-working space is enough, and you may be able to deduct usage fees just like a home office or rented office space. To see if you qualify, make sure to have a receipt that states the origin of expenses to pass to your accountant or tax attorney.
  • Business Debt Interest: Interest on business credit cards or loans is typically tax-deductible. Interest on personal credit cards or loans used to finance your business may also be allowed. Keep in mind that with personal financing you must have proof to show how money was spent. Otherwise, you may face penalties for incorrectly claiming a deduction. If you’re unsure, ask a professional for help defining which debts are eligible for tax deduction.

Operations

The IRS allows businesses to fully or partially deduct operations costs from the following activities:

  • Vehicles and Mileage: Small businesses that require business vehicles, such as delivery services, can deduct maintenance and purchase expenses in full. Small business owners can also deduct mileage for work-related trips if they use a personal car (2017’s deduction rate is 53.5 cents per mile). Keep in mind mileage deductions apply when driving to and from a specific destination for work, such as a business meeting. Daily commutes from home to your place of work aren’t deductible.
  • Payment Processing Fees: Small businesses may use payment processing services like PayPal to send and receive payments. Although these companies charge processing fees that eat into your profits (PayPal’s is up to 2.9% + $0.30 per sale in the U.S., for example), they may be tax-deductible.
  • Utilities: Small business owners who use a home office may be able to deduct a percentage of their utility bills. This is done by calculating the percentage of your home office to your total living space, then applying that percentage to your utility bills.
  • Phone Use: Similarly, small business owners may be able to deduct a percentage of their personal phone bill if your personal phone is also used for business purposes. Remember, again, that detailed record-keeping is essential if you wish to do this. Keep detailed records of how much phone time was dedicated to your business.
  • Depreciation: The IRS allows business owners to deduct the depreciation of equipment purchased for the company with a value of up to $500,000.

Labor

The IRS allows small business owners to deduct expenses related to paying workers and incentivizes for providing benefit programs, including:

  • Salaries and Wages: Salaries given out to employees are tax-deductible. Remember this does not include salaries paid to business owners such as sole proprietors, partners, and LLC members.
  • Contract Labor: The costs associated with paying contracted workers are deductible like hired employees. Just remember to file a Form 1099-MISC for workers who’ve earned more than $600.
  • Commissions: Payments made to your sales staff working on commissions are deductible, as are third-party commissions you might pay an affiliate partner for referrals.
  • Employee Benefit Programs and Qualified Retirement Plans: The costs associated with providing employee benefits programs, such as continuing education, are fully deductible.

Bad Debts

It’s not enjoyable, but most businesses will face non-paying clients or suppliers at some point. Fortunately, businesses can write off the following types of bad debts:

  • Loans to clients and suppliers
  • Credit sales to customers
  • Business loan guarantees

It’s important to note that the ability to deduct bad debts may depend on the type of accounting method you use for your business. Those using a cash accounting method don’t record a sale until payment is received, and therefore don’t have records off of which to base the debt. The IRS doesn’t allow businesses using this method to deduct bad debts. The accrual accounting method counts income once a sale is made, regardless of when you receive payment, so businesses using this method would have records to support a deduction for a bad debt.

Miscellaneous

Let’s not forget the many other types of deductions available to small business owners that can add up to significant savings when used properly, including:

  • Magazine Subscriptions: Yes, even magazines that you leave in your office’s waiting room may be tax-deductible. Remember to only count magazines used solely for your business — magazines brought from home aren’t eligible.
  • Meals and Entertainment: Money spent on business-related meals and entertainment may be up to 50% deductible, though the IRS has stipulations on what qualifies. If you aren’t sure, talk to an accountant or tax attorney to ensure you don’t claim incorrect deductions.
  • Travel: You or any employee that travels for business can fully deduct lodging and transportation expenses.
  • Supplies: Office supplies, cleaning supplies, and other items used for your business are fully deductible.

Getting the Most of Your Tax Deductions

Tax deductions can help small businesses hold onto extra cash to support business growth. It’s wise to be aware of all available small business deductions so you don’t leave hard-earned money on the table; but remember, not all tax deductions apply to every situation. Claiming deductions to which you are not entitled, even by accident, could lead to an audit or other IRS troubles that no small business needs on their hands.

The IRS tax code has many rules and stipulations that may affect your eligibility. Consider turning to a professional to make sure you’re taking the right deductions and amounts. And don’t forget: fees you pay for tax preparation are themselves deductible.